Overview and Forecast of the U.S. Labor Market

By Cassie Williams Jones

The United States Department of Labor released a report recently stating that American employers added 165,000 jobs in April, lowering the unemployment rate to 7.5 percent - a four-year low. 

Leslie Stratton, Ph.D., professor of economics in the Virginia Commonwealth University School of Business, shares her insight into the current labor market and her projections of what’s to come.

There are conflicting opinions about the rate and strength of the U.S. economic recovery. What is your opinion of the direction of the recovery?

STRATTON: The latest figures from the labor market suggest to me that the economy is recovering. The job numbers for April suggest a solid gain of 165,000, however the bigger story with this news release is actually the revision to the March numbers. The original report for March showed a gain of only 88,000 jobs – results that scared economists and the stock market alike. These numbers were much lower than anticipated and much lower than those reported in the previous months (numbers in November and December topped 200,000). The labor market has sputtered a lot over the last few years and the March report suggested the recovery was slowing yet again. The revised number for March is 138,000 – more than 50 percent higher than that initially reported.

Other indicators also suggest the labor market is recovering. The number of vacancies per unemployed worker has fallen by a factor of 2 from 6.2 in June 2009 to 3.1 in February 2013. Job layoffs are down to their pre-recession levels. Not surprisingly, job quits declined precipitously during the recession as workers decided to hold on to their current jobs. There was a lot less “churn” in the labor market at the peak of the recession. “Churn” occurs when workers switch jobs – presumably to positions that better match worker skills and typically offer higher pay. With fewer job openings available, fewer workers were able to make such transitions, hence the lower quit rate. The number of quits has been rising since early 2010, but is still well below pre-recession levels. Thus, workers are still finding it hard to move between jobs.  

While the labor market is recovering, we all wish it would recover faster. This is still, relatively speaking, a jobless recovery. While the unemployment rate is down to 7.5 percent (April) from a peak of 10.0 percent (October 2009), it is still high and has come down in part because of a decline in the labor force participation rate. The unemployment rate equals the number of individuals actively searching for work divided by the number in the labor force. The number in the labor force includes the number employed and the number actively searching for work. If some of those who were unemployed last month stop looking this month, then the unemployment rate falls even though the number employed is unchanged.  


The labor force participation rate is at the lowest it has been in almost 15 years, causing some to question the validity of the unemployment numbers.  How can those dropping out of the workforce (for things like retirement, illnesses and having children, as well as those who are unemployed but have given up on the job hunt) be accounted for?

STRATTON: The labor force participation rate (LFPR) is calculated as the number of individuals employed plus the number unemployed divided by the number in the civilian population (age 16+). In March 2013, the LFPR was 63.3 percent. This is indeed about the rate last observed in 1978. The LFPR peaked in 1997 at 67.1 percent. It had fallen to 66.2 percent in 2006, before the recession hit. Clearly the LFPR has dropped more precipitously since and this is a concern as it means there are fewer labor resources being used in the economy and hence fewer goods and services produced than could be the case. Several factors are acting to lower the LFPR. One is the aging of the population. Individuals over the age of 64 are substantially less likely to be in the labor force than those under the age of 64, but the share of individuals over the age of 64 has been increasing (albeit slowly). (Counteracting this is the fact that the labor force participation rate of older persons has been increasing as the recession has put pressure on these individual’s finances.) Second is the decreasing LFPR of married women with children. Much of this decline occurred between 2000 and 2005. More recently there has been an increase – perhaps necessary to maintain family finances in the face of the recent recession. Most importantly, many individuals have quit looking for work. A slow decrease has been expected for some time, but the decline in the last five years is definitely greater than would be predicted by the aging of the population.


After the report was released, stocks on Wall Street hit record highs, and the U.S. dollar prevailed in global equity markets. What influence does the jobs report have on these entities?

STRATTON: One economic theory regarding the stock market suggests that stock prices mirror the expected net present value of future company dividends. Dividends are typically paid out of profits.  Improving labor market conditions means consumers will have more money in their pockets. More income means increased demand for all normal goods. It is therefore natural that the stock market should respond by increasing prices.


Service industries such as accounting, architecture and engineering, as well as education and health services, added many jobs, but the biggest increase came from lower-wage industries such as restaurants, hotels and retail. Why do you think these industries are experiencing larger gains? Do you foresee this to continue in the near future?

STRATTON: There is a growing body of research suggesting that increasing income inequality may be attributable to technological changes in production methods. Computers can replace many individuals in the “middle” of the wage distribution who perform routine tasks. Computers cannot, however, replace service personnel, nor can they replace the “thinkers” who use technology to make informed, reasoned decisions. I think the jobs numbers are demonstrating this split in the labor market. Technology is likely to continue encroaching on more and more fields. Obviously it has changed the practice of accounting, architecture and engineering, not the least with the advent of tax, drafting and even simulation programs. We are seeing technology play an increasing role in the education sphere as well. These sectors are not going to be immune to change in the long run, but it is hard to predict when these markets will experience substantial changes.  


Which industries are showing the most modest growth, or even cuts? Do you think they will continue sluggish growth, or become more resilient in the coming months?

STRATTON: The government sector has been shrinking for a while now and by all appearances will be continuing to do so throughout 2013. Sequestration will play some role at the national level, but state and local governments around the country (Richmond area included) are still facing tight budgets, as well.  

Industries connected with construction have had a hard time the past five years – from construction/contracting to lumber to household appliances. However, the housing market is picking up now. These industries are likely to see solid growth this year.  

The health care sector is one of the few that has continued to experience solid growth through this recession and recovery. The average age of the population here and around the developed world is continuing to rise, increasing demand for health care services. There are definitely questions about how implementation of federal health care policy will affect this market, but I expect the sector will continue to grow.  
 

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