The Labor Department reported the economy created 292,000 jobs in December, prompting another round of celebrations from the Obama administration and its supporters. They have a case.
The economy has created almost 6 million jobs over the last two years, by far the strongest pace since the late 1990s. The unemployment rate has fallen much more rapidly than most economists expected, and at 5.0 percent is relatively low by historical standards. If we go back to the 2012 election, this is a much better economic performance than even President Obama's backers would have predicted.
While the labor market is clearly improving, most people still don't have much reason to be happy. Real wages for most workers are only slightly above their pre-recession level, and have risen by just over 7 percent since the turn of the century. Even the small gains in real wages that workers have seen in the last couple of years have been largely the result of the collapse in world oil prices. If prices go back up, this windfall will quickly be reversed.
Furthermore, even as unemployment has fallen, there has been no increase in the pace of nominal wage growth. In fact, the most recent data actually show the rate of wage growth slowing slightly. Workers are certainly not getting their share of productivity gains, and certainly not making back what they lost in the downturn.
Other data are also consistent with a weak labor market story. Quit rates remain near recession levels, indicating that few workers feel comfortable enough with their prospects to leave a job without another job lined up. Also, the typical length of unemployment spells looks like what we would expect to see in a recession, as does the number of people working part-time involuntarily.
The disconnect between the low unemployment rate and other measures of labor market strength is explained by the large number of people who have dropped out of the labor market over the last five years. Workers are only counted in the data as being unemployed if they have looked for work in the last month.
Many workers have given up looking for work after being unable to find jobs and are no longer counted as being unemployed. This causes the unemployment rate to hugely undercount the number of people who would actually like jobs.
The percentage of adults who have jobs is still down by more than three full percentage points from its pre-recession level. While some of this falloff is due to baby boomers hitting retirement age, the story is little changed if we just look at prime age workers, people between the ages of 25-54. The employment rate for this group is also down by three percentage points from pre-recession levels. It is not plausible that large numbers of people in their thirties and forties just decided they don't feel like working.
A fallback line for those denying the continued weakness of the labor market is that workers have dropped out because they don't have the skills now being demanded by the economy. There are two problems with this story.
The first is that it looks very ad hoc. After all, before the crash none of these economists predicted that we would see large numbers of workers suddenly lacking the skills needed to get jobs. If an economist wants to tell us this is what has happened in the last few years, then they were obviously wrong in their assessment of the economy before the recession. This invites the obvious question as to when they stopped being wrong about their assessment of the economy?
The other problem with the skills story is that we find a sharp falloff in employment rates of prime age workers at all levels of education. While the drop is sharpest among less-educated workers, the employment rates for workers with college and even advanced degrees are both down by more than 1.6 percentage points from their pre-recession level. It is hard to tell a story as to why large numbers of highly educated workers would suddenly no longer have the skills needed to find jobs.
In short, we are either left with the story that labor market remains quite weak, in spite of the relatively low unemployment rate, or that millions of people in their prime working years just don't feel like working. Fortunately, there is some good news in the most recent data indicating that the "great vacation" may finally be coming to an end.
While the employment to population ratio had been remarkably stable over the last few years, it has risen by 0.2 percentage points in the last couple of months. It appears that people are finally returning to the labor market as job prospects improve. If this pattern continues, we may be getting to a labor market that is tight enough for workers to get their share of productivity growth and perhaps even make up the ground lost in the downturn.
However we still have a long way to go to get to where the labor market should be. If we see another year of months like December, then we may be seeing a labor market where workers feel secure in their jobs and see the potential for rising living standards. There are many reasons that we make not get a year of Decembers, starting with the turmoil in Asian financial markets. The Fed would of course make things worse with further rate hikes. But for now, we can be happy about a good jobs report that will hopefully be repeated in the months ahead.