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David Malpass

The unemployment rate has fallen to 5.6 percent. Over the past six months non-farm payroll jobs have increased by nearly 1 million.

So, can people still call it a jobless recovery?

Well, unemployment did remain much lower in the 2001 recession than in previous recessions, so job growth was weaker after the latest recession. Still, while it would be a welcome development if the unemployment rate fell lower in the months ahead, at 5.6 percent the U.S. is enjoying a relatively full-employment expansion.

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In the late 1990s there was unemployment below 4 percent, but that was an extreme situation, caused by the strong-dollar-related bubble in investment and stocks. That was likely a one-time event.

But why was job growth slow this time around?

The Labor Department’s household survey — which is more representative of the economy than the establishment (or payroll) survey — recorded 1.3 million net new jobs in 2003, compared with the establishment survey’s 61,000 job losses.

Jobs in establishments rose to an unprecedented share of the labor force in 1999, driven in part by a bubbly stock market, Y2K, people working multiple jobs, and corporate excesses in sectors like communications and energy. So, jobs as measured in the establishment survey are still adjusting back to their normal share after the 1999 bulge, which explains much of the weak growth relative to the household survey and to past cycles.

Jobs in the establishment survey, normally 94 percent of the jobs reported by households, rose to 99 percent in December 1999. The share has adjusted back to 96 percent today as labor trends move toward normal in terms of self-employment, multiple jobs, and job turnover rates.

Keep in mind, this expansion is not comparable to previous ones. The unemployment rate peaked this time around at a lower level than in the past, so the job growth that followed was not as strong. More, what we experienced was a deflationary recession, making it unique. Just as there was overly exuberant investment spending in the late 1990s, there was also overly exuberant hiring — especially by establishment firms.

Will rapid productivity growth impede job growth?

Not likely. If productivity growth is rapid, it makes employees more attractive to firms, adding to employment growth. Part of the fast productivity growth of recent years was an undercounting of workers. Revised data will probably show slower productivity growth but more employment. Going forward, rapid productivity growth (but not nearly as fast as the recent peaks) and rapid job growth will take place as the economy expands.

Is the labor participation rate too low?

The labor-force-participation rate (the portion of the over-16 civilian population that is employed or looking for a job) has declined substantially. This rate will begin to rise, but not to the extremes of 1999 and 2000. Some explanations for the recent decline include fewer women in the labor force and a small increase in discouraged workers. In April, this rate was about 66 percent, the same as in March, meaning the labor force (employed plus unemployed) grew as fast as the estimated over-16 population.

But aren’t there a tremendous number of discouraged workers out there?

Discouraged workers are people who say they stopped looking for work because they were discouraged about the prospects of finding a job. There are now 492,000 discouraged workers — up from 203,000 in August 2000.

But the number of discouraged workers varies with the unemployment rate, which fell to unusually low levels in the employment bulge of the late 1990s. What has happened is the number of discouraged workers has returned to normal following this extreme.

Isn’t unemployment much worse than indicated by the headline unemployment rate?

The government releases several measures of unemployment: the conventional one which shows a 5.6 percent rate; a measure now at 5.9 percent which takes into account discouraged workers; and a broader measure, now at 8.4 percent, which measures the whole pool of available workers by adding to the unemployed and discouraged workers those individuals who say they would like a job but aren’t currently looking for one.

In all three measures the current unemployment rate is below that recorded in the mid-1990s and well below the peaks after the recessions of 1990-91 and 1982.

Why are temporary jobs increasing?

Temporary help-services jobs have been on the rise, but this is normal at this stage of the economic cycle. Temporary jobs are a reliable leading indicator of permanent jobs. Firms often increase temporary hiring until they are relatively certain that the employment need will be sustained. Then they make the positions permanent.

But aren’t most of the new jobs being created as part-time jobs?

In April, net new jobs in the establishment survey were 288,000, while part-time jobs actually fell 159,000. The two figures are not comparable. The data on part-time jobs comes from the household survey. In contrast, there were 308,000 net new jobs in March and 296,000 net part-time jobs. The March increase was simply a catch-up month in a volatile time series.

Over the three months ending in April, part-time employment was down 140,000. Over the six months ending in April, it fell 226,000. In contrast, over the past six months, non-farm payrolls have increased 958,000. Hence, contrary to the naysayer contention, part-time employment has actually been declining while jobs have been on the rise.

Aren’t high-paying manufacturing jobs being lost while the service-sector jobs being created are low-paying?

Over the past six months, service jobs excluding retail and leisure have risen by more than 574,000 while manufacturing jobs were unchanged. Lower-paying retail and leisure jobs rose 237,000.

That said, average earnings in service-sector jobs have almost reached parity with average earnings for manufacturing jobs. (This transition has taken place over the past 20 years.) Moreover, the service-sector jobs being created today are in areas where wages are higher than in manufacturing.

Isn’t wage growth too weak to sustain the economic expansion?

No. Nominal wage growth has slowed, but so has inflation. Real wage growth is strong compared to growth in the 1970s and 1980s.

Real average-earnings growth — though currently slower than in the late-1990s — is considerably faster than in previous periods (even though nominal wage growth has been generally unimpressive). Importantly, the growth in total wages and salaries, a measure that combines wages, the length of the workweek, and total employment, has revived.

Isn’t the U.S. losing its manufacturing base through its loss of manufacturing jobs?

Manufacturing employment as a share of total employment has been declining for more than 50 years. This is not a phenomenon specific to this business cycle or even to the U.S. It has occurred in every large industrial country. Productivity gains are more significant in the manufacturing sector. As an economy grows and becomes wealthier, demands for services grow. Productivity gains in manufacturing enable labor to be transferred from goods-production to supply the increased demand for services.

Is there anything else a person needs to know about jobs and the economy in 2004?

Just that this economy is accelerating — second-quarter GDP growth should be much higher than the first quarter’s 4.2 percent rate (which stands to be upwardly revised) — and that recent employment reports are consistent with very strong, near-5 percent year-over-year growth.

– David Malpass is the chief global economist for Bear Stearns.



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