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Economic Insights

While nonfarm payrolls growth is improving, the pace still lags previous rebounds.

The jobs figures for June looked fairly good. The unemployment rate fell to 6.1% of the workforce, and non-farm payrolls expanded by 288,000 and across a broad front of industries and occupations. So far this year, the economy has created 1,385,000 new jobs.1 President Obama was at particular pains to point out that payrolls have at last topped their former high from before the Great Recession. This is all welcome news, but it looks good only when set against subpar patterns made familiar in this otherwise substandard recovery. Perhaps the acceleration of the last few months signals a positive change. Yet it is hardly impressive by the standards of other recoveries, and nothing in the data suggests much better anytime soon.   

Overall Employment Picture
Even on the surface, overall payroll growth tells this disappointing story. It has, after all, taken almost six and a half years for payrolls to recapture their former high. Table 1 reveals how painfully protracted this has been. The second column shows the time in each cycle required for payrolls to top their former employment highs. Of the 10 previous cyclical expansions since the end of the Second World War, the average comes to one year and 10 months. The worst performance other than the present recovery was earlier in this century, when it took the economy three years and 10 months to get back to the old highs, a wait that prompted the media to term that period as a “jobless recovery.”     

 

Table 1. Total Payroll Gains in Past Cycles

Source: National Bureau of Economic Research and the Department of Labor.
*Annualized percent growth rate in payroll employment for the five years following the initial downturn or to the next cyclical peak, if it came within that five-year stretch.
+Because these cycles came one right after the other, the calculation on employment’s growth pace was made as if they were a single cycle, starting the calculation at the beginning of the first cycle.

 

If this is an unpleasant picture, there is one piece of good news embedded in these current figures. During the last year and a half, payroll employment growth has proceeded at an annualized pace of 1.7%. That figure is about the average recorded during all the other cycles. It is encouraging to believe things are back on trend, even if such a pattern would promise no catch-up for the relative ground lost during the majority of this expansion. The last column in the table puts into even sharper relief the inadequacies of this recovery so far. It shows the annualized pace of employment growth in the first five years after the initial downturn (or until the next peak, if the entire recovery was shorter than five years). There is quite a bit of variation from one cycle to another. The average rate of jobs growth, for what it is worth in such a varied sample, equals about 1.6% a year. The worst performance before this recovery occurred in the first few years of this century, when jobs growth averaged only 0.5% a year for the five years of the calculation. But by today’s standards, that looks fairly good. This recovery is the only one that saw a drop in net employment growth over such a long stretch of time. Of course, the five-year measure only goes to January 2013. Since then, the economy has created more jobs, so that finally this June payrolls exceeded that past peak.

Participation and Part Time
The media and many market commentators have used other measures to characterize this recovery. In particular, they have made much about the extent of long-term unemployment as a sign of economic ill health. They have drawn a similar conclusion from the drop in the general participation in the workforce. This consensus would seem to be on the mark with its selection of unemployment duration, but when it comes to workforce participation, the population’s aging trend muddies the analysis and so, also, such simple conclusions.

Long-term unemployment in this recovery is quite simply unprecedented. And the appropriate word is recovery not recession, because the troubling trend actually developed after the economy turned upward. Until this cycle, the highest the long-term unemployment (27 or more weeks) rate ever became as a percentage of total unemployment was 26.0%. That figure was recorded in June 1983, just after the economy’s late-1982 trough.  Typically, the economy suffers this debilitating unemployment most in the early months of recovery, before the pickup in economic activity can have its effect on labor markets. But in this cycle, the figure reached new highs even before the downturn ended, when long-term unemployment rose to 23.1% of total unemployment in late 2008. The percentage touched 34.0% at the economic trough in June 2009, the month that the economy began its upturn, and then it continued to rise for two years more, far longer than in any past recovery. Ultimately, in September 2011, it reached levels of 45.0%, almost double the former high. It has edged down since, but even in the most recent report for June, long-term unemployment still averaged 32.9%, far higher than the worst ever reached previously. The decision to increase the duration of unemployment benefits clearly factored in here, but this pattern also testifies to the remarkable weakness of this recovery generally.  

The participation of people in the workforce has fallen off during this recovery, too. Labor Department figures put participation in the workforce of all those over 16 years of age at almost 66.4% in 2007 just before the Great Recession began. By the cyclical trough of June 2009, the figure had dropped to 65.7%, and has since fallen to 62.8%. Many point to this trend and describe armies of discouraged people who have given up the job search. There is no denying the large numbers of discouraged workers, but there is more at work here than just discouragement. Because the participation statistics count all those above the age of 16, the data are susceptible to distortion by the growing numbers of retirees in the population. This is no small effect. Since 2005, the proportion of the population over 65 years of age has increased by about a full percentage point, to more than 13%. That proportion is expected to continue to rise, according to the Census Bureau, toward 20% of the population in the next seven to 10 years. Though these trends have many economic implications, the participation figures reflect more than just the relative strength or weakness of the recovery.   

Part Time and Prospects
The last major "tell" on this recovery’s substandard nature emerges from the relative growth of part-time employment. Here, the figures cannot be described as unprecedented, but they are nonetheless striking. Table 2 tells the story. It tracks temporary employment as a percentage of total employment in past economic cycles as well as in this one. There clearly is a lot of variation, but still a clear pattern. Part-time work rises as a percentage of all work in economic hard times and falls as the recovery gains momentum. This measure became particularly high in this recent recession, hitting 6.9% of all employment. But that was not a record. The all-time high of 7.6% was set during the 1982 recession. Matters have improved in this recovery, as they did in every other recovery, but they remain high. In the most recent accounting for June, the percentage of jobs that are part time stood at 5.4%, just equal to the record set during the recovery in the mid-1980s.  

 

Table 2. Part-Time Workers as a Percent of All Workers

Source: National Bureau of Economic Research and the Department of Labor.
*Or at the next cyclical peak if it occurred sooner.
+Because the 1980 recession bled into the recession of 1981–82 recovery, this accounting ignores the 1980 trough and makes its calculations based on the 1982 trough.

 

Prospects now, after so much disappointment, seem to offer little better than this substandard past. The influences that have kept this recovery slow remain largely in place. The detailed review in the July 7th Economic Insights, “Can the U.S. Economy Regain Its Old Glory?” revealed two basic considerations. One is the lasting effects of the Great Recession, which generally has dampened appetites for risk among business managers, bringing great caution in its train, especially regarding full-time staffing decisions. The other is the continued weight of the complex legislation that came out of Washington in 2010, most notably the Affordable Care Act and the Dodd-Frank financial reform law. Aside from whether these are good policies or bad, they introduced great uncertainty into business planning by obscuring future staffing and credit costs—a state that could not help but also subdue business’s willingness to hire, expand, or take risk generally. Since so much remains to be clarified about the legislation, it would seem that its ill effects on hiring will likely linger for some time yet to come. Time will heal the scarring from the Great Recession, but that, too, seems likely to occur only very gradually.  Perhaps the return of payroll growth to trend betokens relief on this front, but it is too soon to declare an end to the disappointing patterns exhibited so far in this recovery.

 

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