288,000 Jobs Added, but Unemployment Drops for the Wrong Reasons

by Patrick Brennan

In April, the U.S. economy added 288,000 jobs, according to the Bureau of Labor Statistics’ latest numbers, which easily beats expectations of around 215,000 hires. The unemployment rate dropped to an encouraging 6.3 percent, but not because of that impressive headline number.

Rather, the labor-force-participation dropped 0.4 percentage points, to 62.8 percent. After a few months when it appeared to be holding steady or rising, it’s now dropped back to the lowest level since 1978. Why? It could be the incipient effects of Obamacare reducing “job lock,” or it could be the expiration of unemployment benefits, or it could just generally be frustration with the labor market, especially among the long-term unemployed.

The statistic used to calculate the unemployment rate, in fact, the “household survey” that polls people as to whether they’re employed (rather than asking employers whether they’ve hired anyone), saw the number of jobs in the economy drop by 73,000 jobs, though this number by itself isn’t considered all that reliable.

This is somewhat disappointing news, then, as it reverses a trend over the last few months of long-term-unemployed workers remaining in the labor force. The headline number of 288,000 jobs, an above-trend growth rate, probably also has more to do with a rebound from the weather-related weak months of December and January than anything else (a seasonally adjusted 32,000 jobs were added in construction, for instance, a big number for that industry).

So after a few months of okay performance from the labor force, why are people dropping out or not entering altogether? One possible answer: Obamacare. If the early-February CBO report that predicted that in a few years, 2 million fewer Americans will be working than otherwise would because of the Affordable Care Act is right, that’s going to start showing up in a big way this year. In one sense, this is a good thing: Many people have access to affordable health insurance outside of holding a job for the first time. But when we’re worried about a secular decline in labor-force participation, this is a worrying trend.

Another explanation: We could be seeing the delayed effect of the expiration of unemployment benefits for those out of work for (about) 27 weeks or more. You migth expect that to be the argument laid out by supporters of extending those benefits, though I haven’t seen much of it.

How would that work? In order to receive the benefits, one has to be looking for a job, and therefore “in the labor force,” counting as unemployed. Advocates of the benefits worried that when they expired, the long-term unemployed would drop out of the labor force altogether. That didn’t happen for the first few months, but it seems to have happened some this month. Since Congress continued to debate restoring the insurance (the Senate passed a bill extending it a couple weeks ago), it’s possible people stuck around the labor force in the hopes it would return, and are now finally dropping out.

On the other hand, this jobs report suggests that the shrinking in the labor force came from a smaller number of new entrants and a drop in the number of people re-entering the labor force, which would suggest it had little to do with the unemployment-insurance issue, but each of these statistics gets less and less accurate as they get more granular. We can be relatively confident the labor-force-participation rate dropped; who entered and left it is a little harder to say.

Also on the weaker side: Wages didn’t really rise, with average hourly earnings staying flat. Wages are up just 1.9 percent since last year, meaning no real (adjusted for inflation) wage gains.

This is a bit of a puzzle for economists: As the labor market “tightens” because jobs are being created and the labor force is shrinking, we should see wages rise — which we had seen over the past several months. We didn’t see it this month, though — some people think this means that the long-term unemployed and those out of the labor force who may still be interested in work are holding down wages, since they’re not totally disconnected from the jobs market. That’s (sort of) what Federal Reserve chairman Janet Yellen thinks.

A last Obamacare-related point: We aren’t seeing an uptick in part-time work, and the employer mandate comes into effect in January 2015 for firms with 100 employees or more. The uptick in part-time work we saw before the mandate was delayed last year may have been a fluke or just the nature of a recovering economy; we’ll have to see what happens later this year.

The encouraging number of jobs added is higher than recent trends, but not way higher: Payroll growth has averaged 190,000 job a month over the last twelve months, 203,000 a month over the past six, and 238,000 over the last three (including this month).

The establishment data for February and March were actually better than originally believed: February payrolls were revised all the way up to 222,000 jobs, while March was raised to 203,000.

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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.