The Corner

Today’s Good News in the Labor Market

Another very solid report on the direction of the labor market: more jobs, more hours per job, and higher wages. Now that uncertainty related to the election and the fiscal cliff are behind us, expect to see more reports like this in 2013.

Payroll gains easily beat consensus expectations for February, rising by 236,000 jobs (221,000 including revisions to prior months). The payroll gain was corroborated by the household survey (an alternative measure of jobs that includes small-business start-ups) which saw a rise of 170,000 in civilian employment.

It’s hard to find anything bad in the direction of the labor market. Yes, the labor force contracted by 130,000, driving the labor-force-participation rate back down to a 63.5 percent (tying the lowest level since 1981). But the long-term downward trend for participation is largely driven by demographics and started more than a decade ago. Changes in the labor force are very volatile from month to month, but, in the past year, the labor force is up an average of 50,000 per month while the unemployment rate has dropped to 7.7 percent from 8.3 percent. In other words, we can’t attribute the downward trend in the jobless rate to a shrinking labor force.

Some analysts note that the rise in civilian employment in February was all apparently due to part-timers. However, this data series is very volatile from month to month. In the past year, part-timers are down slightly.

The big question raised by continued declines in unemployment is how the Federal Reserve will react. It says a jobless rate of 6.5 percent could get it to start raising rates. But today’s report undermines the Fed’s projection that we won’t reach 6.5 percent until mid-2015 — it supports my firm’s case for mid-2014. No wonder bond yields jumped on today’s report. In the next few weeks we will be watching the Fed closely to see if it starts making up excuses for why it might wait longer to raise rates after we hit 6.5 percent.

Obviously, the labor market is very far from perfect. The unemployment rate is still way too high and, given technological advances, we should be creating more like 300,000 jobs per month, as in the 1990s. What’s holding us back is the huge increase in government, particularly transfer payments, over the past several years. Another cause for concern is that in the past twelve months, nonfarm payrolls are up an average of 164,000, while civilian employment is up 115,000. Usually, at this point in the cycle, civilian employment is growing faster than payrolls.

On the bright side again, total hours worked are up 1.6 percent from a year ago, while average hourly earnings are up 2.1 percent. As a result, total cash earnings are up 3.7 percent from a year ago (about 2.0 percent when adjusted for inflation), so consumers have room to keep increasing spending. This plow-horse of a recovery continues, and it may be picking up pace.

Robert Stein is an economist for an asset-management firm and a former deputy assistant Treasury secretary for macroeconomic analysis.


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