The economy added a total of 103,000 jobs in December. That is far below consensus expectations for a gain of 150,000. The small increase is particularly disappointing relative to the numbers put out on Wednesday by ADP that showed a gain of 297,000 private sector jobs.
Government payrolls declined by 10,000 and the private sector added a total of 113,000. The consensus was looking for a decline of 12,000 government jobs and thus also for a gain of 162,000 private sector jobs. On the other hand, the unemployment rate, which is derived from a separate survey, showed a surprising drop to “just†9.4% from 9.8% in November. That is the lowest rate since May 2009.
The numbers for October and November were revised higher. Once those are factored in, the overall levels of employment are actually higher than the consensus was looking for. In November we actually gained 71,000 jobs, not 39,000. In October we gained 210,000 jobs, not 172,000 as was reported last month.
Almost all of the upward revisions came from the private sector. The private sector actually added 79,000 jobs in November, not the 50,000 that was first reported, and in October the gain was 193,000, not 172,000.
The unemployment rate is derived from a separate (household) survey from the total number of jobs (establishment) survey. The household survey actually pointed to a gain of 297,000 jobs in December, which incidentally exactly matches the ADP private sector employment gain number.
Unemployment Rate Falls
The unemployment rate fell to 9.4% after rising to 9.8% in November. A year ago the unemployment rate was 9.9%. While that is good news, there is less to it than meets the eye. The civilian participation rate, or the percentage of people in the labor force, both employed and unemployed fell to 64.3% from 64.5% in both November and October. A year ago it was 64.7%. and down from 64.6% a year ago.
It is not all a mirage, though — just some of it. The employment-to-population ratio, or the employment rate, rose to 58.3% from 58.2% in November and 58.2% a year ago.
Average Workweek
For all employees the length of the average work week remained at 34.3 hours for the third month in a row and is up from 33.8 hours a year ago. For production and non-supervisory employees, the length of the average workweek rose to 33.6 hours from 33.5 hours in November, but equal to the level in October. A year ago it was at 33.2 hours.
While an increase of 30 minutes a week over the last year might not seem all that significant, it really is when you multiply it times the 130.712 million people that were working in October (per establishment survey). Average hourly earnings for all employees edged up $0.03 to $22.78 on the month and are up 1.8% from $22.38 a year ago. Average hourly earnings for production employees rose $0.02 to $19.21 on the month, and up 1.9% from $18.85 a year ago.
The year-over-year changes are not great, but then again, inflation is pretty low as well. It is not inflationary from a cost push point of view because it is less than the rate of productivity growth. It also means that there is not a lot of fuel for increased consumption, or the wherewithal for people to pay down their debts more quickly, even if they do have a job.
While the unemployment rate is still better than a year ago, most (not all) of that is a mirage due to falling participation rates. A falling participation rate is not exactly a new development, it has been in a downtrend for a decade now, but the decline has been very steep in the Great Recession and has yet to really turn around.
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 (blue line in the graph 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 67, but to 167.
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 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 (in force) 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, odds were that the article was about childbirth. That clearly is no longer the case today. In October, there were 65.8 million women working (over age 20), not that much behind the 71.4 million men with jobs (per household survey).
Participation Rate
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. It ticked up in August, and managed to hold onto that increase in September, but fell again in October.
This month it fell to 64.3%. A rising participation rate will put upward pressure on the unemployment rate, but should never the less be considered good news. A falling participation rate will lower the unemployment rate, but is bad news for the economy.
Employment Rate
The other side of the decomposition of the unemployment rate is the employment-to-population ratio, or the employment rate (black 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 uptrend 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 [red line, right hand scale] 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% a year ago.
It has erratically pushed its way higher so far this year and hit 58.5% in August, and remained there in September. Unfortunately the decline resumed again in October, falling to 58.3%, in November it fell back to 58.2%. That was the lowest percentage of the population working since November of 1983. In December we ticked back up to 58.3%.
That is still a lousy level, but at least it is moving in the right direction, and indicates that at least part of the drop in the unemployment rate is for real. Graph from http://www.calculatedriskblog.com/
Better Than the Last 2 Times
Note that in the 1991 and 2001 recessions, the employment rate continued to decline for a very long time after the recession ended. The NBER declared the Great Recession officially over as of June 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).
To my mind, the employment rate should get more attention than it does, and the unemployment rate less, although clearly the two numbers are related. The unemployment rate though can be more subject to distortions than can be the employment rate. That was proved true in November when it rose sharply, and is also true this month when it plunged.
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 11.2% in December.
Duration Measures Deteriorate
There was bad 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. Next week we should get the Job Openings and Labor Turnover Survey (JOLTS), which will tell how many people are getting laid off versus quitting and the actual number of new jobs created.
The numbers today simply show the net difference between jobs lost and jobs gained, rather than the totals for each side. Unfortunately, the JOLTS data will be for November, not December.
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 pre-war recessions. Over the summer we had a couple of months of good news on that front, after two years of absolutely horrifying numbers. This month brings more bad news in this regard.
The average duration of unemployment (red line) rose to 34.2 weeks from 33.9 weeks in November. The peak was 35.2 weeks in June. We are well above the 29.3 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. It rose for the fourth month in a row, hitting 22.4 weeks, up from 21.7 weeks in November and an interim low of 19.9 weeks in August.
It is still well below the 25.5 weeks (all-time record) in June, but is still higher than it was a year ago when it was at 20.4 weeks. The rapid decline in both the average and median duration in July and August was highly encouraging, the reversal over the last four months is deeply disappointing.
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 an Everest relative to any previous experience (except perhaps for the Great Depression, but the data is not available).
Perils of Long-Term Unemployment
Long-term unemployment is a very different experience than short-term unemployment. It is not just an unplanned vacation, it is an existential threat 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 (varies a bit by state). The nationwide average is about $300 per week. Thus for 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 thus have to dig into their savings and/or run up their credit cards. It is also much harder to get a job if you have been out of work for a year than if you have been out of work for just a month or so.
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. Without the big tax deal between Obama and the GOP, about two million people would have lost this last lifeline over the last month.
4 Different Groups of Unemployed
The census bureau tracks four different groups by length of unemployment. The short-term unemployed are those who have been out of work for less than five weeks (blue line). Almost always this is the largest group of the unemployed. The next biggest group is usually those who have been out of work between five and 14 weeks (red line).
Being out of work for a month is really not that big a deal, but as the joblessness stretches on it becomes a bigger and bigger problem. Not only do your finances start to run dry, but your contacts start to dry up and your skills start to wither. The longer you are out of work, the lower your likely salary once you return to work.
Normally the next two groups, those out of work for 15 to 26 weeks (green line), and those out of work for more than 27 (orange line) weeks are a very small proportion of the total unemployed. That changed in a very big way during this downturn, and in December, 6.441 million — or 44.3% of the 14.485 million total unemployed — have been looking for more than 26 weeks.
That is an increase of 113,000 people from last month, but is still off the peak in May, when there were 6.763 million very long-term unemployed. A year ago there were “only†6.133 million people, or 40.1% of the total unemployed, that were out of work for more than 26 weeks.
The numbers in the graph below are not adjusted for population growth, so we should expect to see a bit of an upward tilt in all four groups over time. Still, in a healthy economy, the number of very long term unemployed should be down closer to 1 million, not above 6 million.
On the other hand, the 2.657 million who are out of work for less than five weeks is actually lower in absolute terms than the average of the last 40 years (despite population growth over that time). Note that in every prior post-war recession, the number of short-term unemployed remained the largest group. The massive number of long-term unemployed is really what sets this downturn apart from all the previous ones.
