Catch-up from Winter Doldrums not Enough

Today’s employment report showed us that the weather did indeed have an impact on hiring in previous months and now that spring is underway (all is relative), we are seeing a catch-up. The drop in the labor force and precipitous drop in labor force participation, however, underscores how far we still have to go. The increase in hiring we are seeing is not enough to keep engaged those who are marginally attached to the labor force. The drop in labor force participation among 35-44 year-olds is particularly discouraging, as these are our “learners and earners” in society. They should be in the prime of their careers; instead, they are un- or underemployed, struggling with a debilitating overhang of student debt and in a sad reflection of our economy, some are giving up entirely. The drop in participation among men in that age group is greater than that of women, which could further suppresses earnings; women tend to accept lower-paying jobs than men do, just to stay employed.

Indeed, the earnings data in the report were not nearly as encouraging as the hiring data, which showed nearly 300,000 net, new hires in April.  Key measures of earnings flatlined between March and April: the average workweek and average hourly earnings were both unchanged in April. Year-over-year gains in hourly earnings remained a dismal 1.9% in April, barely outpacing CPI inflation, and well below Federal Reserve Chair Janet Yellen’s goal of 3-4% gains in broader wage measures.

The headline on the unemployment rate, which plummeted to 6.3%, was particularly misleading. The number of people looking for a job declined by more than 800,000, with close to 300,000 dropping out of the (measured) ranks of the long-term unemployed. When combined with the payroll report, that suggests there were more people who gave up looking for work entirely after losing extensions to their unemployment insurance, compared to those who could or would accept any job at any wage.  Hence, the Fed’s move to sideline the unemployment rate as an accurate summary of labor market conditions.

Readings on what Yellen has called her “dashboard” for the health of the labor market remained particularly weak: the participation rate fell; the number of long-term unemployed came in at 35.3%, still well above historic norm; and, the number of people accepting part-time employment for economic reasons remained essentially unchanged at 7.5 million.

Bottom Line: Hiring is picking up again, but not fast enough to keep those marginally attached to the labor force engaged. This will remain a concern for the Federal Reserve and should, for that matter, disturb us all. Some will argue that the reduction in participation, especially among the long-term unemployed, is reason to focus more on short-term rather than long-term unemployment as the Fed assesses wage and inflation pressures. The proof is in the pudding, however, with earnings stagnant. We should all remember that a similar debate was underway during the Great Depression: much of the labor force was considered virtually unemployable after so many years of losses, and many believed then that the best we could do on the unemployment rate was 20%. They were wrong.

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