US Job Market Shows Strong Gains, But Why Is Part-Time Work Rising?

by: Ed Dolan

With improvement in all the headline indicators, today's report on the US employment situation was one of the strongest of the recovery. The unemployment rate fell 6.1 percent, a new low for the recovery. Payroll jobs rose by 288,000 in June. The broad unemployment rate and long-term unemployment also fell to new lows. At the same time, though, the number of people working part-time rose sharply. How should we understand the increase in part-time work even as the job market improves?

First, a look at the numbers

The monthly survey of business establishments showed gains in payroll jobs throughout the economy. The main goods-producing sectors - mining, construction, and manufacturing - all added jobs. In the service sector, retail trade and healthcare showed the largest gains. Government employment, which has been on a downward trend throughout most of the recovery, added 26,000 jobs, with local government, especially education, accounting for most of them.

The data for unemployment rates, which come from a separate monthly survey of households, showed that the civilian labor force grew by 81,000 and the number of employed workers by 407,000. (Job gains from the household and establishment surveys differ, in part, because the household survey includes self-employed and farm workers, in part because of the treatment of multiple jobholders, and in part because of sampling error.) The number of unemployed workers fell by 325,000. The standard unemployment rate, U-3, decreased to 6.1 percent, the lowest level since 2008. The broad rate, U-6, which takes discouraged workers and involuntary part-time work into account, also fell to a new low for the recovery.

One of the most disturbing features of Great Recession has been an unusually high level of long-term unemployment. As the next chart shows, the percentage of unemployed workers who have been out of a job for 27 weeks or more fell sharply in June. That, too, marks a new low for the recovery, although long-term unemployment is still less than halfway back to its prerecession percentage of the labor force.

How to understand the rise in part-time work?

At the same time that the headline numbers showed broad improvement, the share of the labor force working part time (fewer than 35 hours per week) rose sharply in June, reaching its highest level in more than two years. People who equate part time jobs with bad jobs will view that as a negative development, but the reality, as I discussed in a post a few months ago, is more complex. Here are some things to keep in mind in trying to understand the significance of the rise in part-time work.

First, it is important to keep in mind that, as the next chart shows, most of those who work part time do so voluntarily, for reasons such as childcare, family or personal obligations, school, retirement or Social Security limits on earnings. Involuntary part-time workers (part-time "for economic reasons" in BLS terminology), in turn, fall into two categories. Some have jobs that are, in principle, full-time, but which are not currently providing full-time hours because of slack business conditions. Others have taken jobs that are part-time because that is all they could find, even though they would prefer full-time work. The difference is that as business conditions improve, many of the first involuntary category will move back to full time without a change of jobs, whereas many of the second will have to quit their part-time jobs to take different ones that offer more hours in order to return to full-time status.

The different categories of part-time work have behaved quite differently over the course of the recession and recovery. To bring out the different trends more sharply, we can rebase the data so that the share of the labor force represented by each category of part-time work is assigned a value of 100 for June 2009, the month in which the recovery began. That gives us the next chart:

The chart shows that the recession and recovery did not have a great impact on voluntary part-time work. Some voluntary part-time jobs disappeared early in the recession and most have come back since, with a sharp uptick in the most recent month.

The involuntary categories behave very differently. Not surprisingly, as the economy fell into recession, the number of workers reporting that their employers had cut their hours because of slack business conditions grew substantially. As soon as the recovery began, the "slack work" category began to fall. A continued downward trend seems likely. The "only find part time" category also increased during the recession, presumably as full-time workers who lost their jobs took whatever work they could find. However, rather than falling as the economy recovers, this category continues to rise. Why?

One hypothesis is that the continued high level of involuntary part-time work is linked to the decline in long-term unemployment. Research by Alan Kruger noted that over half of a sample of long-term unemployed had left the labor force or were still unemployed when surveyed in 2013. Of those who had managed to return to work, only about 14 percent had found full-time jobs, while twice that many had taken part-time work. That suggests that as the economy improves, some involuntary part-time workers manage to find full-time jobs, but others who had previously experienced long-term unemployment take their place. If so, the "only find part time" category, too, will eventually begin to decrease as the economy fully recovers.

A different hypothesis is that the continued growth of "only find part time" reflects structural changes in the economy. Just what changes is not clear, however. Some people point to the Affordable Care Act, especially the employer mandate, which may provide an incentive to replace full-time workers with part-time workers. Some point to other changes in taxes and regulations that raise the effective tax rate on labor. As I pointed out in my January post on part-time work, neither of these explanations is very convincing, but that does not preclude the possibility that other structural factors, yet to be identified, may be at work.

Finally, it is worth mentioning that continuing high levels of involuntary part-time work may be significant in another way. Writing for the Atlanta Fed's Macroblog, Dave Altig and Pat Higgins point out that the level of involuntary part-time work is a key factor in restraining the growth of wages. Of course, that is bad news for those who would like to earn more, but it is also good news insofar as it means that the Fed will not have to apply the monetary brakes anytime soon in order to avoid a rise in inflation.

The bottom line is that part-time work is an important but ambiguous indicator. The "part time jobs are bad jobs" mindset is far too simplistic. June's uptick in both the voluntary and involuntary categories may be an aberration, or they may be the beginning of trends that will help us sort out the good from the bad of part-time work.

Follow this link to view or download a slideshow with complete charts and commentary on the latest employment situation.

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