The economy added a total of 216,000 jobs in March. That is better than consensus expectations for a gain of 185,000. The increase is also better than the numbers put out on Wednesday by ADP that showed a gain of 201,000 private sector jobs.

Government payrolls declined by 14,000 and the private sector added a total of 230,000 jobs. The consensus was looking for a decline of 18,000 Government jobs and thus also for a gain of 203,000 private sector jobs. The unemployment rate, which is derived from a separate survey, showed a drop to 8.8% from 8.9% in February. It was at 9.8% as recently as November. The consensus was looking for the unemployment rate to remain at 8.9%.

Upward Revisions

The numbers for February and January were revised higher. In February we “actually” gained 194,000 jobs, not the 192,000 reported last month. In January we gained 68,000 jobs, not 65,000 as was reported last month. This is the second upward revision to the January data that first came out as a gain of 36,000 jobs.

The private sector revisions were even more positive than that. We actually added 240,000 in February, not the 222,000 reported last month. In January the gain was 94,000, not 68,000, or the initial read of 50,000. These upward revisions are a very good sign and should not be overlooked. If you add the upward revisions to the March reported gains, you get a total gain of 223,000 total jobs, and 274,000 in the private sector. That is a very solid performance.

Household vs. Establishment Surveys

The unemployment rate is derived from a separate (household) survey from the total number of jobs (establishment) survey. The household survey has been more upbeat than the establishment survey recently. In March it shows a gain of 291,000 jobs. It pointed to a gain of 250,000 of jobs in February. The number of people unemployed according to the household survey fell by 131,000 in March after falling 190,000 February. The decline was 622,000 in January.

However, generally the numbers from the household survey are considered less reliable than are the numbers from the establishment survey. That does not mean they should be disregarded entirely, and the divergences between the two series are often the biggest near turning points in the economy. The household survey does a much better job of picking up people who are self-employed, and of very small start up businesses than does the establishment survey.

Unemployment, Participation & Employment Rates

The unemployment rate fell to 8.8% from 8.9%; it was at 9.8% as recently as November. A year ago the unemployment rate was 9.7%. The civilian participation rate, or the percentage of people in the labor force, both employed and unemployed, was unchanged at 64.2%, where it also was in January but down from 64.0% a year ago.

The employment to population ratio, or the employment rate, inched up to 58.5% from 58.4% in each of the prior two months. It was 58.6% a year ago. The increase in the employment rate, with the participation rate being unchanged suggests that the drop in the unemployment rate is “real” and not just people dropping out of the labor force.

Workweek & Earnings Averages

For all employees, the length of the average work week was unchanged at 34.3 hours. It is up from 34.1 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 February and from 33.4 hours in January. A year ago it was at 33.1 hours.

Average hourly earnings for all employees were unchanged at $22.87 and are up 1.7% from $22.48 a year ago. Average hourly earnings for production employees down $0.02 to $19.30 for the month, and up 2.0% from $18.93 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 (see “Productivity Rises 2.6% in 4Q”).

Income Growth Lacking

Income growth in the middle and lower half of the income distribution has been sorely lacking, not just recently, but for over a decade. Well actually it has been pretty bad for the bottom 90% of people, but particularly anemic for the lower half of the income distribution. Higher incomes for those who are working means higher sales and more quickly repaired household balance sheets.

The anemic growth in average hourly earnings is not a good thing for the economy, although it is good news for corporate profits, and hence the stock market, at least in the short term. It also means that it will be tough for a generalized increase in overall prices (aka inflation) to occur, as opposed to increases of relative prices of highly visible prices such as food and gasoline.

While the unemployment rate is better than a year ago, some (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.

Employment Rate Up, Participation Rate Down

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 66 or 67, but to 166.

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. In March, the participation rate was unchanged at 64.2%, but generally has been trending downward. It was 64.9% a year ago. The employment rate rose to 58.5%, its third increase in the last four months, but remains below the 58.6% rate of a year ago.

The rebound in the employment rate is very good news. The employment rate is a very underappreciated economic statistic and really should be much more widely reported.

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 (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 March, there were 63.57 million women working (over age 20), not that much behind the 71.96 million men with jobs (per household survey).

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 early in 2010 this year, but then trended back down again in the second half. It has been steady at 64.2% so far in 2011.

A rising participation rate will put upward pressure on the unemployment rate, but should nevertheless be considered to be good news. A falling participation rate will lower the unemployment rate, but is bad news for the economy. It is good to see the participation rate stabilize, and I would expect it to start to increase over the next few months, which would tend to slow the downward progress on the unemployment rate. Over the longer term, though, the rebound in the participation rate is likely to be limited by the Baby Boom retirement wave.

Employment-to-Population

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 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 (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% early in 2010. It erratically pushed its way higher through the middle of 2010, but then collapsed back to 58.2% in November, equaling the record low since November of 1983.

It has however started a slow rise again, and is now up to 58.5%. That is still a lousy level, but it is encouraging to see it rising again. It indicates that at least part huge of the drop in the unemployment rate since November is for real. Graph from http://www.calculatedriskblog.com/

Better Than the Last Two Times

Note that in the 1991 and 2001 recessions, the employment rate (employment population ratio on the graph) 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 in December and January when it plunged.

This month’s decline in the unemployment rate was due to an increase in the employment rate, not a decline on the participation rate. That means the decline was “for real” not an illusion.” However, over the last year, a big part of the decline from 9.7% unemployment to 8.8% has been due to the drop in the participation rate.

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. The same is true for President Obama.

Duration Measures Mixed

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 them. 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 February, not March.

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. 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 39.0 weeks from 37.1 weeks in February, and up from 36.9 weeks in January. That is nominally a new record, but the definition was changed in January, so the historical comparison for the average is now meaningless, or at least has to be taken with a bag of rock salt.

Previously, if someone reported being out of work for more than 2 years, the BLS would enter them in the database for being out of work for 2 years. The maximum was changed to five years. It’s an interesting statistic, and relevant in the face of the “99ers,” or those who have been out of work so long that they have exhausted even their extended unemployment benefits.

The month-to-month change is still for real, but the change in the definition makes the longer term historical comparisons less relevant. Still, for those who are interested, we are well above the 31.7 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, but that too, was under the old definition.

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. It is also not distorted by the change in “top coding” of the data. Its history is not quite as long as the average.

There the news was also discouraging. It rose to 21.7 weeks, from 21.2 weeks, reversing two months of declines. It is still well below the 25.5 weeks (all-time record) in June. It is still higher than it was a year ago when it was at 20.3 weeks. Given the change in the definition for the average, the median is the more reliable statistic right now.

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 that data is not available).

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.

Extended Benefits

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 25% 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. However, the extended unemployment benefits are divided up into several different tiers. Even though benefits were extended for another year, the maximum is still at 99 weeks. The extension was more about people who have been out of work for 40 weeks or 60 weeks continuing to get benefits, not people getting benefits beyond 99 weeks.

The Census Bureau tracks four different groups by length of unemployment. The short-term unemployed are those that have been out of work for fewer than five weeks (blue line). Almost always this is the largest group of the unemployed. The next biggest group is usually those that 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 March, 6.122 million, or 45.5% of the 13.542 million total unemployed have been looking for more than 26 weeks. That is a increase of 129,000 from February, partially reversing sharp drops in the previous two months. It is well off the peak in May, when there were 6.763 million very long-term unemployed.

A year ago there were 6.517 million people, or 43.9% 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 2.449 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.

Later today, I will post part two of my analysis of the employment report, where I will focus on the demographics of joblessness, and on where in the economy jobs are being created or lost. I will also give more of my thoughts about what we should be doing about the employment situation, and the significance of this report in a larger historical context.
 
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