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The Awful New Jobs Report Has One Silver Lining

Getty Images/Justin Sullivan

The good economic news came to a screeching halt Friday when the Bureau of Labor Statistics released the August jobs report. The economy added just 142,000 jobs last month, well below forecasts of 230,000. The unemployment rate ticked down to 6.1 percent. In addition, the June and July reports were revised down a combined 28,000.

That’s not good, but it’s only one report and those numbers will be revised twice more. A better way to look at job growth is through the three-month moving average. When you look at it that way, you can see that the economy still has taken a slight step forward in the past few months, but Friday’s report is clearly disappointing.

Bureau of Labor Statistics

It wasn’t all bad news. An alternative measure of unemployment—known as the U-6 measure—includes not just those looking for work, but also people who want a job but currently aren’t searching. That measure decreased from 12.2 percent to 12.0.  Wages also ticked up 0.2 percent and the number of long-term unemployed continued its long, slow decline.

Bureau of Labor Statistics

There has also been a hidden, positive trend in the labor force that hasn’t gotten much attention the past few months: the labor force participation rate has stopped declining. The labor force participation rate (LFPR) is the number of Americans who are either working or looking for work as a share of the working-age population.  Like job growth, it fell sharply after the Great Recessions, but since then, it hasn’t recovered. The LFPR stands at its lowest rate since the late 1970s. Since the size of the labor force is a key determinant of economic growth—all else equal, fewer workers means fewer goods and services—this is a worrisome trend.

But it’s not surprising either. Even without the financial crisis, economists already projected the labor force participation rate to decrease as baby boomers retired. In econo-speak, this is known as the “structural” change in the labor force. But the decline has still been larger than expected due to the financial crisis. Younger Americans stayed in school while many able-bodied workers dropped out of the labor force entirely, discouraged at their jobs prospects. Those are called “cyclical” factors that affect the LFPR. As the economy improves, those trends should reverse themselves. Strong economic growth should draw middle-aged workers back in the labor force, for instance.

It’s important to separate these structural and cyclical factors. If an improving economy isn’t going to draw back many workers into the labor force, then we are much closer to full employment than policymakers currently predict. If the opposite is true—if a huge number of workers are waiting on the sidelines for stronger growth—then we could be much further away from full employment. This has important implications for monetary policy. The Federal Reserve is currently debating when to raise interest rates. Do it too early and the Fed will choke off badly needed growth. But doing it too late could risk moderate inflation.

So, is the decline in the labor force participation the result of structural or cyclical factors? It’s tough to tell, but there are signs that at least some of it is cyclical. Since April, the rate has stayed basically constant at 62.8 percent. At first blush, a stagnant LFPR may not seem like an indication that that workers are being drawn back into the labor force. But remember, baby boomers are retiring at the same time. Those two movements may be offsetting each other. 

Bureau of Labor Statistics

If that’s the case, then that is definitely good news. Workers are returning to the labor force. And the Federal Reserve still has time to keep monetary policy loose before inflation increases above its 2 percent target.

Of course, this trend in the labor force participation has only been occurring for a few months. It could continue dropping the remaining of this year. But for now, it’s a positive sign in an otherwise disappointing jobs report.