The U.S. labor market is enjoying the longest string of monthly job gains in the nation's history. Almost 15 million jobs have been created since job growth resumed more than six years ago, and this follows a financial crisis, a circumstance that historically has translated into weaker recoveries.
The U.S. job market has bounced back from this financial crisis faster than countries that experienced financial crises in the past. Still, there are popular criticisms that downplay the strength and resiliency of the U.S. labor market.
We will take a close look at seven of these criticisms and determine whether they are valid. One emerging theme is that a good portion of the remaining problems in the job market appears to be structural. Deep dive: Economy.com Look at the U.S. Employment Situation
1. Criticism: Trend job growth isn't as impressive as it was earlier this year. (Valid)
Trend job growth is running 175,000 per month, compared with 239,000 as recently as March. Therefore, this criticism of the job market is valid, with a caveat. Trend job growth is more than sufficient to keep pace with growth in the working-age population, which we estimate requires only 100,000 jobs per month.
Also, the downshift in trend job growth was inevitable. The expansion is aging and job growth typically moderates as the economy approaches full employment. As it approaches, fewer workers are available to hire, making it more difficult and timely for businesses to fill open positions. Possible solutions are to raise wages, increase training, or hire workers that businesses would have otherwise not considered.
There are instances in which job growth didn't moderate after the economy hit full employment, measured by the difference between the unemployment rate and the Congressional Budget Office's estimate of the non-accelerating inflation rate of unemployment. We don't believe that this refutes the belief that job growth weakens as the economy hits or surpasses full employment.
The unemployment rate in the second quarter was at the CBO's estimate of full employment, but we don't believe all the conditions have been met. For example, the U-6 unemployment rate averaged 9.7% in the second quarter, above the 9% we would consider consistent with full employment. Therefore, attempting to declare the economy at full employment based on a single labor market statistic is unrealistic. This likely explains why there are some instances in which trend job growth failed to slow after the economy apparently hit full employment. Odds are that in such instances full employment was actually lower; the 1990s is a case in point. Deep dive: Where Is Full U.S. Employment?
2. Criticism: Wage growth is weak. (Valid)
Nominal wage growth is weaker than would be expected given how much the job market has tightened over the past few years. For example, the employment cost index for private wages and salaries, our preferred measure of wages, was up 2.6% on a year-ago basis, compared with 2% in the first quarter and 2.2% in the second quarter of 2015. In a normal economy, private wages and salaries should be growing 3% to 3.5%.
There are signs wage growth will accelerate further, but there are forces that could limit the acceleration. First the good news: small businesses are grumbling about the difficulty in finding qualified workers, and the quits rate isn't far from the peak last cycle. The quits rate is a good proxy for confidence in the labor market, as workers are likely switching jobs voluntarily for better opportunities and higher wages.
However, wage growth remains weaker than that implied by the quits rate. Therefore, other factors including shadow labor market slack, poor productivity, and wage rigidities are likely weighing on wage growth. Poor productivity and wage rigidities will likely be the most persistent drags on wages.
Rigidities refer to a situation where the price of a good does not change immediately or readily to the new market-clearing price when the demand and supply curve shifts. There can be downward wage rigidities, which normally occur during a recession, and upward wage rigidities, which normally occur during expansions. Upward wage rigidities may explain why wage growth hasn't accelerated as much as would have been expected given the tightness of the labor market. This is visible in the share of workers reporting the same wage as one year earlier.
According to the San Francisco Fed, the share of workers reporting the same wage as the prior year has remained high through this expansion and is broad-based across type of pay and educational attainment.
Productivity growth may remain depressed. That normally means weak income growth, as wages reflect the marginal product of labor. Therefore, the lack of wage growth will remain a big criticism of the labor market.
3. Criticism: With 94 million people not in the labor force, the job market is weak. (Not valid)
It may sound odd to characterize the job market as improving when 94.3 million people are not in the labor force -- and that number is growing. There is a host of reasons for people not being in the labor force and not all reasons are economic. They include disability, being in school, and family responsibilities.
The number of people who are not in the labor force and don't currently want a job because of discouragement is tied to the state of the economy. That number has been trending lower and is slightly above that during the last expansion.
Not everyone outside the labor force wants a job. Of those not in the labor force, only 5.8 million currently want a job, down from its peak of 7 million in 2012. As a share of those not in the labor force, those who want a job account for 6.2%; that's around the midpoint of the range during the last expansion and well below that in the mid-1990s.
The ranks of those not in the labor force is also climbing because of the expanding population and aging workforce, which are structural factors. Since the job market began turning around in 2010, the number of people not in the labor force has risen by 11 million, but the lion's share is among those 55 and older.
4. Criticism: The low labor force participation rate reflects cyclical weakness in the economy. (Not valid)
The primary reason the labor force participation rate, at 62.8%, is among the lowest since the late 1970s is the aging population, which is structural. It would be unrealistic to expect the labor force participation rate to fully recover the decline since the last recession. For one, the labor force participation rate has been trending lower for the past 16 years.
The labor force participation rate has dropped 3.2 percentage points since the beginning of the last recession. However, more than half of the decline is due to the aging of the population and another good chunk is attributable to the increase in the number of workers on disability. Therefore, only a small portion, around 0.5 percentage point, is cyclical.
The good news is that the labor force participation rate for prime-age workers, those 25 to 54, has been trending higher. This likely reflects the increase in wages and improvement in the housing market, which is boosting demand for construction workers and increasing participation among prime-age working men.
We believe the labor force participation rate will peak this cycle at 63.1%.
5. Criticism: The mix of job favors low-paying industries. (Not valid)
It is true that for a good part of the expansion, the composition of job growth was heavily weighted toward low-wage, low-valued industries. Though this was the case for longer than anticipated, it wasn't unusual since low-productivity jobs, which are in retail and leisure/hospitality as well as other industries, are normally those that recover first. As the expansion has aged, mid- and high-paying job gains have accelerated, and 2015 was their best year. According to our estimate, mid-wage jobs rose by 1.15 million and high-wage added 527,000. This is the fourth consecutive year that combined mid- and high-wage employment rose more than low-wage jobs, and the gap has widened.
However, labeling this as the "bartender recovery" based on the view that employment at restaurants and other eating places has accounted for an unusually large share of the increase in employment is overdone. Since the recession ended in June 2009, total employment has risen by 13.6 million, but restaurants and other eating places have accounted for only 14.4% of these gains, or 1.95 million jobs.
This is less than the 17.7% contribution in the last expansion but more than the 6.7% in the expansions of early 1991 and early 2001. Restaurants' share of total employment has increased in this expansion, but that's a continuation of a secular trend that began in the 2000s. Therefore, this is not unique to the current expansion.
Similarly, the increase in employment hasn't been mostly in part-time jobs. The household survey shows that employment has risen 11.6 million since mid-2009. Full-time employment has accounted for all of this increase.
6. Criticism: Too many people are working part time for economic reasons. (Valid)
There has been a noticeable decline in the number of people at work part time for economic reasons, or those that want full-time work but are working part time because of slack business conditions or the unavailability of full-time jobs. This number remains high, but there are likely structural factors at play.
Since peaking in 2010, the number of people at work part time for economic reasons fell more than 3 million to 5.9 million in August 2016. The sheer number is more than 1.5 million more than that during the last expansion, implying room for improvement. However, the trend has weakened, with the number of people working part time for economic reasons having changed little since the fourth quarter of last year.
Should we assume that this will return to the level during the last expansion? Probably not. Because the decline in the number of those working part time for economic reasons has been slower than the unemployment rate, this hints of potential structural factors at work, including the Affordable Care Act.
7. Criticism: Employers cannot find qualified workers. (Valid)
Survey evidence suggests this is occurring as an increasing share of small businesses are having a hard time filling open positions. However, there are solutions, including increasing pay, training, and hiring workers who would otherwise not be considered.
Other evidence is mixed. Data from the DHI Group show that job vacancy length, or the number of days it takes to fill a vacant job, sharply declined during the recession and has since rebounded to new heights. This cyclical pattern in vacancy duration is unsurprising: A recession means that more people are unemployed, and this makes it easier for firms to find qualified hires. As the labor market heals, filling vacancies becomes harder, since workers become more scarce and potential hires can be choosier.
There is more at work here than current labor market conditions, and focusing on that alone can make it look as if vacancy duration is inexplicably high at this time. Specifically, average vacancy duration has been rising over time even after controlling for labor market conditions. A possible explanation for the lengthening time needed to fill open positions is that labor market dynamism has been falling. Job separations and hires have trended downward over time, and the average length of employment has gone up. Deep dive: Economy.com Look at the U.S. Employment Situation
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.