Employers are hiring and the unemployment rate is falling. But by at least one measure, the job market is in far worse shape than it was before the recession that ran from 2007 to 2009 — a worrisome situation that explains why much of the middle class is still struggling.
The nonprofit Hamilton Project has been tracking a growing “jobs gap” that reveals unseen ways the economy is still in a recessionary state. If the same trends in employment and population growth that were in place before the recession were in place now, total employment would be about 6 million jobs higher. Since there are roughly 11.3 million unemployed Americans now, it’s obvious that the unemployment rate would be lower, and the economy much stronger, if an additional 6 million people were working.
Researchers at the Hamilton Project attribute those missing 6 million to two things. First, the pace of immigration has slowed since 2008, on account of tougher policies for getting into the United States and more foreigners who decide to stay home because the weak U.S. economy isn’t so appealing after all. Some people assume immigrants are a net drain on the U.S. economy, but there’s ample evidence that they boost output by starting businesses, hiring workers and spending money. So fewer immigrants means less economic growth.
A surprising pullback
The other reason is a surprising pullback in the portion of Americans who even want to work. The labor-force participation rate is declining for a variety of reasons, such as younger people going to college or graduate school instead of looking for a job, and out-of-work middle-aged people who simply give up looking for a job and become labor-force dropouts. Economists have been expecting the participation rate to inch up as the economy recovers. But it hasn’t.
These changes might sound technical or arcane, but they’re actually momentous. Slowing population growth and a shrinking workforce almost inevitably lead to reduced economic output, which translates into fewer job openings for ordinary people, lower pay and stagnant living standards. For middle class people wondering why it has gotten so hard to get ahead, this is part of the answer.
There’s also the question of whether we’re measuring a new and difficult economy by old and outdated standards. The unemployment rate is probably the single most watched economic statistic, and it has been getting generally better, dropping from a peak of 10% in October 2009 to 7.3% today. The unemployment rate is so important that the Federal Reserve has said it won’t begin to raise interest rates until it falls to at least 6.5%.
But if the unemployment rate fails to capture millions of missing workers, maybe it’s not the right number to target. On the current trend, the unemployment rate could hit 6.5% in 2014 or early 2015. The jobs gap will still be sizable by then, however. Unless there’s a rapid and unexpected surge in hiring, in fact, the Hamilton Project estimates the jobs gap will be in place for years after the unemployment rate hits the Fed’s target.
The real question may be whether a slow-growing economy with fewer jobs is the new normal. If it is, living standards could stagnate indefinitely, unless unforeseen innovations arrive to shake the economy out of its funk. That could happen, but it’s probably not a good idea to count on it.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.