It looks like Labor might actually have something to celebrate this Labor Day. OK, the celebration will not be with champagne — more like with Budweiser — but they still got something to cheer about in today’s employment report.
While the unemployment rate did tick up to 9.6% from the 9.5% level it was at in both July and June, that increase was due to more people entering the labor force — a reversal of the recent trend towards a declining civilian participation rate. The total number of non-farm jobs fell by 54,000, matching the decline in July and down from a decline of 175,000 in June.
However, all of those declines — and then some — were due to pink slips being given to temporary Census workers. There were 114,000 Census workers laid off in August, following layoffs of 161,000 and 236,000 in July and June, respectively. The Census workforce peaked at 564,000 in May, and in August was down to just 82,000, so it is a pretty safe bet that the Census layoffs will be smaller again in September.
Given the political sensitivity of the employment numbers, I think the large volume of Census layoffs speaks volumes about the integrity of the Obama administration. It would have been very easy to keep them, or at least a large percentage of them, on the payroll through the November elections.
Gains in Private Sector & Productivity
The private sector added a total of 67,000 jobs in August, down from an addition of 107,000 in July but up from 61,000 in June. The July and June numbers were revised sharply higher. As of last month, it was thought that the private sector added just 71,000 jobs in July and 31,000 in June. The total non-farm payrolls had previously been reported as a decline of 131,000 in July and a loss of 221,000 in June.
For all employees, the length of the average work week remained at 34.2 hours and is up from 33.8 hours a year ago. For production and non-supervisory employees, the length of the average workweek increased to 33.5 hours from 33.4 hours in both July and June; a year ago it was at 33.1 hours. While an increase of 24 minutes a week over the last year might not seem all that significant, it really is when you multiply it times the 130.311 million people that were working in August.
Average hourly earnings inched up to $19.08 from $19.05 in July, and up from $18.69 a year ago. That works out to be 2.1%, which is not great. But then again, inflation is pretty low as well.
Consider Where We’ve Come From
It is also worth considering how well we are doing on the employment front relative to where we were a year ago. Last August, the economy dropped 212,000 jobs in the month, including 215,000 from the private sector. The unemployment rate stood at 9.7%. This month is sort of a milestone in it is the first month that the unemployment rate is lower than the rate a year ago since the recession started. That, however, has to be taken with a big grain of salt, since the civilian participation rate last year was 65.4% and it is just 64.7% now.
Participation and Employment Rates Rise
While the unemployment rate gets the headlines, it is worth digging just a little bit deeper into the number. The unemployment rate is really the civilian participation rate divided by the employment rate, also known as the employment population ratio. The total population is divided into three groups: the employed, the unemployed and those not in the workforce.
The participation rate (red line in graph #1 below) is the percentage that are either employed or unemployed. It will never reach 100%. For that to happen, we would have to do away with all child labor laws and insist that those lazy 2 year olds stop napping and get to work. The Social Security retirement age would have to be raised not to 66 or 67, but to 127. The highest the participation rate ever reached was 67.3% in April of 2000.
The participation rate will normally slump during a recession and its aftermath. However, as the first graph below shows, the participation rate was in a huge secular increase from the mid-1960’s until the end of the 20th century. Yes, it would flatten out and decline slightly during recessions, but it would always return to a higher high, and the low during the next recession was always much higher than the previous low. That did not happen in the last expansion. The highest the participation rate hit during the last expansion was 65.8%, in January 2005.
The Historical Context
The secular rise in the participation rate was due to two huge demographic trends. First was the entry of the Baby Boomers into the workforce. Remember, you are neither employed not unemployed when you are a kid. The Baby Boom started in 1946, so by the mid-1960’s they were reaching the age when they were either employed or unemployed (or out of the country getting shot at in Vietnam). That was a major force lifting the participation rate until the early 1980’s.
The second major demographic force that started just a bit later (with notable strength) but continued longer was the increased participation of women in the labor force. Back in the mid-1960’s, if a magazine article mentioned the words “woman” and “labor” in the same paragraph, the odds were that the article was about childbirth. That clearly is no longer the case today. In August, there were 65.6 million women working — not that much behind the 75.5 million men with jobs.
The front end of the Baby Boom is just now hitting retirement age, and that will put continuing downward secular pressure on the participation rate for years to come. The participation rate took a big dive during the early part of the recession, started to rebound earlier this year, but then started to drift lower in June and July. The uptick to 64.7% in August is very good news, even if it does put upward pressure on the unemployment rate.
The other side of the decomposition of the unemployment rate is the employment to population ratio, or the employment rate (green line). That is the percentage of the population that actually has a job. One way or another, these are the people that have to support the rest of the population. This is a hugely under-reported number, and one that deserves a lot more attention than it gets.
Like the participation rate, it had been in a secular upward trend from the mid-1960’s through the end of the century. It is, however, much more volatile than the participation rate (it has to be — if it always moved in tandem with the participation rate, the unemployment rate would never change). Its high water mark was 64.7% in April 2000.
Unlike previous recoveries, it never came close to hitting a new high after the 2001 recession was over, only getting back to 63.7% in March of 2007 before starting to fall again. During the Great Recession it really fell off a cliff, hitting 58.2% in December 2009. It has erratically pushed its way higher so far this year and was 58.5% in August. Still, that is a smaller percentage of the population employed than in November of 1983.
Better than the Last Two Times
Note that in the 1991 and 2001 recessions, the employment rate continued to decline for a very long time after the recession ended. While the NBER has not declared the Great Recession officially over, the consensus of economists is that when they do get around to it, they will probably date the end of the recession as July 2009. You would never know it from listening to the press or the pundits, but this recovery has been significantly better on the jobs front than the two recessions that preceded it, particularly when it comes to private sector employment (for more on that see Post-Recession Private Job Growth).
As a matter of economic history, it should be noted that both Presidents Carter and Reagan get a bit of a bum rap when it comes to the unemployment rate. When the participation rate is rising, the economy has to produce significantly more jobs to keep the unemployment rate from rising. On the other hand, the second President Bush gets way too much of a free ride when it comes to the unemployment rate, since the participation rate was falling for most of his time in office. As for Obama, if the participation rate had remained where it was when he was sworn in, and the employment rate was where it is now, then the unemployment rate would have been 11.0% in August.
Duration Down Again
There was further good news on the duration of unemployment front. Over time, the number of short-term unemployed really does not vary that much. People are always losing jobs, or in boom times, quitting jobs. The difference is that in good times, they can find a new job without much difficulty. It is the number of long-term unemployed that really make the difference between boom and bust.
The extraordinarily long time that people have been out of work after they lose their jobs is what has really set this recession apart from all the previous post-war recessions. We now have the second straight month of good news on this front after a very long string of absolutely horrifying numbers.
The average duration of unemployment (red line) fell to 33.6 weeks from 34.2 weeks in July and the 35.2 week peak in June. Still, that is well above the 25.2 week level a year ago, and at the time, that was an all-time record. Prior to the Great Recession, the previous all-time record high was set in June of 1983 at 20.8 weeks.
The median (blue line, half above, half below) duration will always be lower than the average duration since it is impossible to be unemployed for less than zero weeks. Its history is not quite as long as the average, but it too showed significant improvement, falling to 19.9 weeks from 22.2 weeks in July and 25.5 weeks (the all-time record) in June. While it is still much higher than it was a year ago at 15.5 weeks, the rapid decline over the last two months is highly encouraging. Prior to this downturn, the highest the median duration had ever hit was 12.3 weeks in May of 1983.
Note that it is normally the case that the duration of unemployment continues to rise even after the recession ends. This happened not just in the last two recoveries, but in all post-war recoveries. However, following the 1991 and 2001 downturns, the persistency of high and rising unemployment duration was much more pronounced than in the earlier downturns. This time, while the peak was a Mount Everest relative to any previous experience (except perhaps for the Great Depression, but the data is not available), it is coming unusually quickly following the end of the recession (again assuming a 7/09 recession end). That, of course, assumes that the downtrend we have seen in the last two months continues.
Long-term unemployment is a very different experience than short-term unemployment. It is not just an unplanned vacation, it is an existential treat to your standard of living. When you lose your job you don’t know how long it will take you to find a new one. You get unemployment insurance benefits (usually, but not always), but in general, they cover just 60% of what you were earning when you were employed, up to a cap of around $400 per week (this varies a bit by state).
Thus for many, if not most, the pay cut is much more than 40%. Most people have fixed, or at least semi-fixed expenses that use up more than 60% of their income. They therefore have to dig into their savings and/or run up their credit cards. Regular state unemployment benefits run out after 26 weeks, and after that people move over to extended benefits which are paid for by the federal government, and which this time around have become a political football.
By the point that people get to the six-month mark of joblessness, they have usually depleted most of their savings outside of their 401-k or IRA plans, and may well have started to dip into those as well (in the process paying a 10% penalty plus having the withdrawals taxed as ordinary income). That is particularly true this time around, because going into this recession the savings rate was at a historic low.
In past downturns, the unemployed who were also homeowners could generally tap into their home equity to tide them over. With 23% of all homes with mortgages now underwater, and another 5% with less than 5% positive equity, that option is no longer available for millions. Thus, without extended benefits, these people would be left with no financial resources at all.
(EDITOR’S NOTE: We will continue Dirk van Dijk’s report analysis in Part 2.)
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
More about Zacks Strategic Investor >>
ABERCROMBIE (ANF): Free Stock Analysis Report
KELLY SVCS A (KELYA): Free Stock Analysis Report
MANPOWER INC WI (MAN): Free Stock Analysis Report
MCDONALDS CORP (MCD): Free Stock Analysis Report
Zacks Investment Research
