Labor Market Woes Remain

The recently released ADP employment report shows that the U.S. economy added 208,000 jobs in November. If the Bureau of Labor Statistics report on Friday shows similar job gains, there will be little doubt that the labor market recovery is gaining steam. Over the last six months, employment gains have averaged 235,000 each month, the unemployment rate has edged below 6 percent and the U-6 rate, a broad measure of labor underutilization, has fallen to 11.5 percent, its lowest level in six years.

However, some areas of concern remain. Going forward, we need to shift focus to wage growth, labor force participation rates, the quality of jobs being created, the pool of long-term unemployed workers and the skills gap.

While employment has continued to increase, wage growth has remained fairly tepid. Average hourly earnings for workers have increased by a mere 2 percent over the last year, almost 2 percentage points lower than the rate of wage growth before the recession. This suggests that while workers are finding employment, many of the new jobs are coming from the low end of the market. As a result, the increased demand for workers has exerted no significant pressure on wages. Sectors such as retail, hospitality and leisure have accounted for significant portions of recent job gains and these jobs are typically lower-paying than jobs in manufacturing, construction, and professional and business services. Also, many workers looking for full-time work have had to settle for part-time jobs with lower pay. Over the past 12 months, the number of these involuntary part-time workers has averaged over 7 million.

Labor force participation is another area of concern. The current labor force participation rate stands at 62.8 percent, a level not seen since the 1970s. In a recent paper, Federal Reserve economists concluded that much of the recent decline in the labor force participation rate is the result of structural factors. Using state-level data, the authors find that high unemployment rates have caused many job-seekers to become discouraged and drop out of the labor force altogether. As of October 2014, the bureau calculates that there are nearly 800,000 “discouraged workers” across the country who have given up finding a job. Many discouraged workers who are older have accelerated their move into retirement or have begun claiming disability payments. What is truly worrying is the decline in participation among prime-age workers, particularly among those in their early twenties. It is a bad sign when someone who is fresh out of college feels discouraged about entering the labor market and finding a job.

Within the unemployed, there still exists a large pool of long-term unemployed workers. Before the recession, only 16 percent of the total unemployed had been without work for 27 weeks or longer. Currently, over 30 percent of the unemployed fall into this category. These long spells of joblessness stigmatize workers, as shown in a recent survey by Rand Ghayad who found that firms rarely contact workers who have been out of jobs for longer than six months. Hence placing these individuals back into full-time positions is likely to be a slow process. This is particularly likely to be true of older workers, who make up 20 percent of the long-term unemployed and who are more resistant to taking up jobs that require wage cuts, occupational changes or geographic relocations.

A final factor constraining hiring and slowing the recovery is the “skills gap,” defined as the mismatch between the types of skills employers need and the skills workers actually possess. In a recent survey, 93 percent of employers said they faced an overall skills gap and 15 percent attributed the problem to a lack of workers with educational backgrounds in science, technology, engineering, and mathematics. As an example, the pharmaceutical company Bayer recently reported difficulty in recruiting enough qualified job candidates with two-year or four-year STEM degrees.

To conclude, the U.S. labor market has picked up remarkable steam over the past year, but still faces challenges in the months and years ahead. During the recovery, most attention has centered on the monthly unemployment rate and job creation numbers. However, a more accurate snapshot of the labor market requires shifting focus to indicators such as wage growth, labor force participation and long-term unemployment.