After the Jobs Report, a Look at Three Critical Labor Market Trends

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

In the aftermath of last week’s jobs report, there are three critical labor market trends that need to be examined more closely.

Reversing the Shrinking Labor Force. To my mind, the most important labor market question is how much can stronger growth repair the damage to the labor force participation rate.

There are two reasons that I give this question such primacy. The first one is micro: most people depend on their paycheck, not their portfolio, so absent a job or enough hours of work, their living standards will take a hit.

The second is macro. Overall economic growth is the sum of productivity growth and labor force growth. Less of the latter makes it harder to grow faster, creating a vicious cycle of weak GDP growth, weak job growth, and low labor force participation.

Some of the decline in the labor force, maybe a third to as much as half â€" is driven by older workers dropping out, but even that is not as benign as it sounds. As some people are healthier for longer, they’ve been extending their work force tenure in recent decades and thus it’s a mistake to assume that every older labor force dropout is happy to leave (though many surely are â€" let’s not fetishize work!).

At any rate, those of us concerned about these dynamics were happy to see the pop in the labor force participation rate last month, though of course no one should make a big deal out of one-month result like this.

Here, however, is an interesting and favorable trend. It’s from the labor force flows data, which tracks people’s monthly movements in and out of employment, unemployment, and not in-the-labor-force (or NILF; remember, if you’re looking for work, you’re unemployed; if you give up the search, you’re NILF). This line shows the share of the population moving from unemployment to NILF, and is thus a driver of the decline in the labor force.

Source: Bureau of Labor Statistics

It’s clearly a cyclical variable, as you’d expect, and it shot up in the great recession, as discouraged job seekers left the labor force. But while it is still elevated, its decline is quite sharp, a positive sign for restoring some labor force growth.

Increasing Job Growth. A quick point about the underlying pace of job growth:  The 192,000 jobs added in March is a solid number, but we’re still way behind where we need to be in terms of job quantity. Various commentators made a big deal of the fact that with last month’s gains, the level of private sector employment was finally back to its prerecession peak.

But all that means is that we’ve finally climbed out of the deep hole that the recession blew in the nation’s payrolls; it’s certainly not enough jobs to employ the growth in the working-age population over all that time. And we’re talking a long time here: It took more than six years just to repair the damage, compared with two, three and four years in the previous three recessions/recoveries. (Why it’s taking so much longer to regain lost jobs â€" why today’s recoveries tend to start out “jobless” â€" is another important question, beyond my present scope).

The figure below, using numbers developed by the economist Heidi Shierholz of the Economic Policy Institute, shows where we are compared with where we should be (the figure uses total payrolls, including government). The gap between the two lines last month amounts to over seven million jobs; that’s how many jobs short we are in the labor market once you adjust for the fact that just by dint of population growth, there are a lot more people who need work.

So sure, March posted decent job gains, and as the figure shows, we’re slowly catching up to the trend line. But the operative word there, especially for policy makers, is “slowly.”

Source: Heidi Shierholz, Economic Policy Institute

Raising Wages. We covered job quantity. What about job quality? There’s been a bit of noise lately about some acceleration in the growth of wages. The figure below shows annual growth rates for two nominal wage series for private sector workers â€" the overall average and lower paid workers â€" along with the core inflation measure most closely watched by the Federal Reserve.

Average wages have been growing at a relatively low rate of 2 percent and show little sign of any acceleration. The pace of wage growth for lower-wage workers has picked up a bit in recent months, but remains in the noninflationary 2 to 2.5 percent range.

Source: BLS, BEA; “core prices” is the core PCE deflator.

In fact, you can easily observe the validity of that assertion by comparing the wage trends to the price trends for the inflation measure most closely watched by the Federal Reserve, the core PCE deflator. Not only is wage growth not bleeding in price growth, but there’s a growing gap between the two. Important, inflationary expectations are also “well anchored” around 2 percent.

Too often in recent years, powerful forces yell “Inflation!” every time some working stiff sees a couple of months of real pay gains. For the Fed to listen to such Yellen (sorry…) would be a great way to ensure the continuance of the unbalanced returns to growth that have dominated this recovery so far.

So, putting it all together, the job market is slowly but steadily improving, it’s got a long way to go, and there are some tentative signs that labor market sideliners may be getting pulled back in. Wage growth is steady and nonthreatening, inflation-wise, and given how little growth in this recovery has flowed to paychecks as opposed to profits, it is essential that whatever bit of heat there is in the job market be fanned, not stamped out.