Many readers likely remember Oldsmobile's advertising campaign of 25 years ago that claimed "This is not your father's Oldsmobile" while extolling the virtues of a "new generation" of Oldsmobiles. Similarly, today's labor market is not that of our fathers' and, unfortunately, it has far fewer virtues. While US equity markets lurched higher last Friday after a stronger than expected September employment report and upward revisions to the July and August reports, as has often been the case during this recovery, the attractive headline figure belied troublesome underlying trends.
In September, the US economy added jobs for the 48th consecutive month, a rather enviable streak. During the first nine months of the year, the economy added an average of 227,000 jobs per month and the unemployment rate fell from 6.7% to just 5.9%. By May of this year, the economy had finally recouped all of the jobs lost during the Great Recession. On the surface, all of this suggests strength in the US job market, but the devil lies in the details lurking below the surface. First, a significant contributor to the decline in the unemployment rate has been a reduction in the labor force participation rate. Since the recession officially ended, the unemployment rate has fallen from 9.5% to 5.9% while the participation rate has declined from 65.5% to 62.7%, the lowest participation rate since 1978. In short, the falling unemployment rate is nearly as much a function of workers exiting the labor force as it is a function of the number of jobs being created.
Secondly, wage growth remains moribund, with hourly earnings advancing just 2%, year-over-year, in September. While September CPI has yet to be released, consumer prices rose 1.7% in the year ended in August, meaning real wages have been essentially flat over the last year despite consistent job growth. The lack of income growth is tied to a third issue, the quality of jobs being created. Year-over-year, 40% of jobs gained were in low paying ambulatory healthcare, retail trade, leisure and hospitality, and temporary help services. Fourth, and possible most disturbing, is the distribution of job growth across age groups. While the US has finally recouped the jobs lost during the Great Recession, there remain fewer employed workers between the ages of 16 and 54 than there were prior to the recession. Importantly, there are far fewer employed workers age 25 through 54, those in what should be the prime of their working lives. This trend continued in September, as the number of jobs held by those ages 55 and older accounted for all of the increase in jobs.
The US labor market has consistently added jobs over the last three years. However, many of those jobs are of low quality and as a result income growth has been relatively stagnant. Additionally, those in the prime of their working lives have largely been left behind during the recovery. This has significant negative implications for the potential earnings of this cohort over the entirety of their working lives. It also has negative implications for the housing market, which not surprisingly has lagged this year. In short, the US labor market is significantly weaker than the growth in non-farm payrolls would suggest.