Labor Market Recovery Debate Hinges on the Long-Term Unemployed

The Cheat Sheet

Source: Thinkstock

Source: Thinkstock

Even while economists worry that the current unemployment rate in the United States — which has ticked down from a recession high of 10 percent to 6.7 percent in recent months — hides a great number of the labor market’s problems, metropolitan areas across the country are reporting pre-recession era jobless rates. Cities from New Orleans to Austin to Omaha are not only experiencing fairly healthy unemployment numbers, but employers have begun to report there is not enough labor supply. With employers facing difficulties filling open positions, workers are now able to demand wage increases.“There are spot labor shortages” that probably will “broaden out over the next year as the job market steadily improves,” Moody’s Analytics chief economist Mark Zandi told Bloomberg in an interview.

Read more: 10 Charts Revealing America’s Miserable Job Situation

Throughout the nearly five years that have passed since the recovery officially began, one particular hallmark of the economy’s ongoing weakness has been the sluggish growth of wages. But now economists have growing evidence that the labor market is tightening enough to allow workers to finally get real wage increases that significantly outpace inflation, although opinions are divided.

Read more: Did the Obama Administration Approach the Jobs Recovery Wrong?

“I do think there are signs wage growth is picking up,” said Zandi. Earlier in the year, when the cold weather kept job creation low across the country, Zandi expressed doubt that wage gains would accelerate before 2016, but now he predicts that last year’s after-inflation growth of 0.8 percent will jump to 1 percent in 2014 and 1.1 percent in 2015. “I think we can say definitely the slowing in wage growth is over,” the economist added. “The national economy will return to full employment one metro area at a time.”

Read more: Jobs, Hiring, and Layoffs: Where Does the Labor Market Stand?

However, not all economists subscribe to the theory that tightness is growing in the labor market. In a March 31 speech at a Chicago conference, Federal Reserve Chair Janet Yellen explained that she believes the high number of underemployed Americans, the meager wage growth, the extraordinarily large share of the unemployed who have been out of work for six months or more, and the record-low levels of labor force participation suggest “there is still considerable slack in the labor market.” Yellen used the fact that considerable labor market slack remains, meaning there are significantly more people willing and capable of filling a job than there are jobs for them to fill, as a reason for the central bank to continue to help workers through its expansive monetary policy. The Federal Open Market Committee has held the federal funds rate on overnight loans among banks near zero since late 2008, and its most recent policy meeting indicated that the rate will only be increased to 1 percent at the end of 2015 and to 2.25 percent at the end of 2016.

And Jesse Rothstein, University of California at Berkeley professor and former Department of Labor chief economist, agrees with Yellen. “The labor market actually has a fair bit more slack than would be indicated by the national unemployment rate,” he told Bloomberg. “If you believe that, then the same problem has to hold in local labor markets as well.”

The debate between those economists who see slackness in the labor market and those who see tightness hinges on how measures of underemployment, low labor force participation, and long-term unemployment are interpreted. One figure — the overall, headline unemployment rate — can by no means tell the whole labor market recovery story, and for that reason, the labor market can appear to be slackening or tightening depending on how the data is explained. Of particular importance to this debate, is the impact the large number of long-term unemployed Americans have on other job market statistics, how the average of state jobless numbers distorts the nature of the labor market recovery, and what type of jobs are being created and experiencing wage gains.

In 2010, during the worst of the labor market downturn, only two cities had jobless rates below 5 percent. But in February, 49 — or 13 percent — of the 372 metropolitan areas in the United States reported unemployment rates of less than 5 percent. For example, in the metropolitan areas of Austin-Round Rock-San Marcos, New Orleans, and Omaha, the February unemployment rate stood at 4.8 percent, 4.2 percent, and 4.5 percent, respectively, according to Labor Department data. The lowest unemployment rate was recorded in Houma-Bayou Cane-Thibodaux, where offshore-oil exploration in the Gulf of Mexico is a strong job creator. As the unemployment rate of this metropolitan area indicates, job market health can very greatly on a regional basis thanks to the presence of certain industry.

The oil-drilling, construction, and health care industries are among those in most need of workers. “There is a stronger economy and a lot of growth in the tech sector,” Prestige Economics President Jason Schenker told Bloomberg. “Construction is booming. There is some migration of people for jobs, which has a multiplier effect creating more jobs.”

Comparatively, twenty-nine metropolitan areas still have unemployment rates at — or higher than — the October 2009 post-recession peak of 10 percent, including Atlantic City, New Jersey and Fresno, California.

“Tightening local markets while the national market remains weak would reflect some geographic mismatch, in which demand is rising in some localities while the supply — unemployed workers — are concentrated elsewhere,” Harry Holzer, a Georgetown University professor of public policy and former chief Labor Department economist, told Bloomberg.

Zandi, in his analysis of future growth, made the same conclusion. U.S. employers added 200,000 jobs to payrolls last month, and at that pace, he argues the job market is slowly but steadily tightening.  Further evidence of that tightening is the fact that the short-term unemployment rate, which excludes those out of work more than six months, has fallen to 4.6 percent. “This isn’t far from the rate that has prevailed historically in good job markets,” the economists wrote in a March 14 labor market assessment. “Long-term unemployment remains a serious problem and is the principal reason overall unemployment remains high at 6.7 [percent],” he stated.

“The reason that short-term unemployment is dropping and the number of longer-term unemployed Americans remains constant, is because new jobs created go to those whose jobs skills are more relevant. Those idle longer than six months have a difficult time obtaining jobs, despite a growing number of openings, because skills and marketability have eroded,” Zandi noted. That reality leaves the long-term unemployed in a bubble and allows economists to describe the labor market as tight because employers see a limited number of desirable candidates for the jobs that are available. The perceived lack of workers is only exacerbated by the fact that large number of Americans who have been jobless for longer than six months have dropped out of the labor force.

The Labor Department’s February Jobs Openings and Labor Turnover Survey confirms that reality. The so-called JOLTS report, which is reported with a one-month lag, revealed that employers posted the largest number of job openings in February since January 2008. Job openings, a measure of labor demand, increased 299,000 — or 7.7 percent — to a seasonally adjusted 4.17 million. The JOLTS report is a favorite of Yellen because it describes “the underlying dynamics of the labor market.”

The tighter labor market also appears to be boosting wages, according to Zandi. His calculations show that average hourly earnings have grown at close to 2.5 percent year-over-year rate so far in 2014 — an increase from the 2 percent growth rate recorded at this time last year and 2012’s 1.5 percent growth rate. Of course, “this overstates the pickup, as hourly earnings are affected by the mix of jobs being created.” Also key is whether lower-paying occupations are affected more than higher-paying ones. “Regardless, spot labor shortages are showing up more frequently, and employers are paying more to attract qualified workers,” concluded Zandi. Although, it should also be noted that over the past year, average hourly earnings only rose 49 cents, or 2.1 percent, which is a very small increase by historical standards.

Overall, the employment strength in the forty-nine areas that saw jobless rates lower than 5 percent “says the economy is getting better in a lot of places,” David Wiczer, labor-market economist at the Federal Reserve Bank of St. Louis, told Bloomberg. The national, headline unemployment rate may be a closely watched indicator, but “it is difficult to average things,” he said. “This does have implication for wage pressure at the local level.”

While the possibility that workers will move for good-paying careers cannot be downplayed, several mitigating factors must be considered. According to Brookings Institution economist Gary Burtless, regional demand for labor will have the greatest impacts on paychecks for lower-wage earners because individuals are not likely to relocate for those types of positions. This means that employers looking to fill higher-paying jobs have much larger pools from which to draw workers because those positions are much more desirable, and therefore workers do not have as much leverage to ask for raises.

When considering how the type of available jobs impacts unemployment levels structural factors must be analyzed. In the opinion of R. Glenn Hubbard, dean of Columbia University Business School, the slow progress of the labor market recovery can be explained as the result of both cyclical and structural problems. On the one hand, the Great Recession is the source of current unemployment problems, meaning workers should rejoin the labor force as the economy improves. Yet, structural changes are also at work, he noted. The U.S. population is aging and, about one-quarter of the decline in the labor force participation rate is due to retirements. But equally important, Hubbard believes, is the discouragement of job seekers, poor work incentives created by government unemployment policies and the growth of federal disability programs, and the inadequacies of schooling and training. Plus, globalization and technological advancements have severely curtailed employment and wage growth for low-skill workers.

“A big puzzle looms over the U.S. economy: Friday’s jobs report tells us that the unemployment rate has fallen to 6.7% from a peak of 10% at the height of the Great Recession. But at the same time, only 63.2% of Americans 16 or older are participating in the labor force, which, while up a bit in March, is down substantially since 2000. As recently as the late 1990s, the U.S. was a nation in which employment, job creation and labor force participation went hand in hand. That is no longer the case,” Hubbard wrote on April 4 for Stanford University’s Hoover Institute. As his comments indicate, this recovery is unlike any ever experienced by the United States, and that complicated economists’ efforts to unravel conflicting evidence of the health of the jobs market.

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