May Job Numbers: Not Good But No Reason to Panic

As I mentioned this morning, the Bureau of Labor Statistics reported on Friday that the national unemployment rate increased slightly in May to 8.2%, while non-farm payrolls increased by just 69,000 jobs. The report was disappointing, especially since the economy added 226,000 jobs a month in the first quarter of 2012. However, we do know the first quarter job numbers were likely overstated because of the unusually warm weather. What this means is that Friday's jobs report doesn't necessarily tell us that the economy has slowed, just that the pace of job growth remains too slow to quickly bring down the unemployment rate. 

Cutbacks by the public sector continue to slow the economy, but the primary problem remains slow growth in the private sector. Corporate profits are high, but firms seem unwilling to invest those profits because unemployment remains high. Normally, to break this cyclical of high unemployment holding back investment, we might expect a big boost in public-sector spending on infrastructure or increases in unemployment insurance expenditures. That would boost demand and signal to firms to begin making new investments to meet rising demand. But right now the public sector is pulling back and thus the economy limps along with very high unemployment.

Of all the commentary on the May jobs report, Felix Salmon at Reuters has the most outraged and thoughtful rundown of what is wrong right now with economic policy.

Below are highlights of what some of the nation’s leading labor economists have to say about the latest jobs report.

Overall, this month's report is disappointing, though not surprising. With the warm winter advancing employment growth earlier in the year, payroll numbers were bound to be low, while the return to growth in labor force participation arrested the fall in the unemployment rate. Even so, unless the economy picks up, producing jobs at a much higher rate, it is difficult to see how unemployment will be anything but persistent for some time. As it currently stands, the economy is still recovering at a slower pace than after the previous four recessions.


Unemployment has been higher for longer than in any previous recession since the 1930s (and would be higher still if a substantial number of people had not stopped looking for work for now because they view their current prospects of finding a job as dim). Nevertheless, support for UI has waned among lawmakers at a time when the economy will continue to need the support that it provides and when long-term unemployment remains at unprecedented levels.

Before topping 40 percent in the recent slump, the percentage of the unemployed who have been looking for work for more than six months had never exceeded the 26 percent reached in June 1983 in data going back to 1948. Private employers have added jobs for 27 straight months, but the economy still lacks the strength to generate the kind of job growth (200,000 to 300,000 jobs a month or more on a sustained basis) that would restore normal employment in a reasonable time frame. 

As policymakers focus on the challenges ahead at year end, due to expiring tax cuts and spending provisions plus scheduled across-the-board spending cuts — all at a time when the fragile recovery will still need nurturing — they should remember that UI is one of our most cost-effective measures for supporting the economy. UI injects new spending into the economy quickly. It doesn’t add to the long-run budget deficit because UI claims fall as the economy strengthens, and policymakers have always let temporary programs expire. But, we’re not there yet, with an overall unemployment rate that tops 8 percent and an extremely high long-term unemployment rate.
 

The Recovery Act in 2009 and 2010 and other policy actions helped put people back to work in the public and the private sector through a menu of tax cuts and public investments — including in transportation infrastructure and education — thereby driving the sales growth business owners depend on. Slow sales as rising oil prices constrained consumer budgets contributed to the 32,000 retail jobs lost in March at general merchandise stores. Reports from the National Federation of Independent Businesses, an organization of small businesses with 40 or fewer workers, continue to show that sales are the most important concern for small-business owners, as has been the case since July 2008. Poor sales closely track the unemployment rate.

Public spending and investment can help spur the economy by boosting demand for private goods and services at a time when business investment remains hampered by unemployment, and unemployment and household debts constrain consumer spending.

The Recovery Act’s spending and investment helped generate demand in the economy. But since the Recovery Act began winding down in 2010, total government spending and the demand it generated have contracted by 1% compared to the beginning of the Obama administration. For comparison, by the end of President Ronald Reagan’s first term government spending had expanded by 12% after inflation, which helps explain the more rapid recovery of jobs from the early-1980s recessions.
 

Though the unemployment rate rose from 8.1 percent to 8.2 percent in May, the rise was due to the fact that 642,000 people entered the labor force, boosting the labor force participation rate from its low of the downturn of 63.6 percent in April to 63.8 percent in May. This increase in the labor force participation rate should be interpreted with caution — there is significant month-to-month variability in the labor force participation figures, and it is likely that May’s increase is simply a correction of April’s drop. Regardless, the labor force participation rate is still far below the 66.0 percent level of December 2007. This recent EPI analysis shows that roughly two-thirds of the decline in the labor force participation rate since the start of the recession is due to weak job prospects in the Great Recession and its aftermath (these changes are generally labeled cyclical)...

All else equal, if the labor force participation rate were currently 65.3 percent, there would be 3.6 million more people in the labor force. If these 3.6 million “missing workers” were in the labor force and were unemployed, the unemployment rate would now be 10.3 percent instead of 8.2 percent.

Thanks to Keystone Research Center summer intern Pak Man Lam for his assistance putting this blog post together.

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