Unemployment Rate Falls to 4.6 Percent in November, a New Low for Recovery: The unemployment rate fell to 4.6 percent in November, almost equal to the pre-recession lows in 2007. However, the sharp decline was partly due to people leaving the labor force, the employment to-population ratio (EPOP) was unchanged at 59.7 percent. It actually fell slightly for prime-age workers (ages 25-54), from 78.2 percent to 78.1 percent, although it is still 0.7 percentage points above its year ago level.
The establishment survey put job growth at 178,000, roughly in line with expectations. The revisions for the prior two months’ data were largely offsetting, leaving the average for the last three months at 176,000.
This would be a healthy pace for an economy that is near full employment, but the low EPOP suggests that the economy still has a substantial way to before the labor force is fully employed. While there is some evidence of an acceleration in the pace of wage growth, it is very weak.
The average hourly wage reportedly fell 3 cents in November after a sharp jump reported for October. These erratic movements are likely due to measurement error, but the November fall does weaken the case for accelerating wage growth. Wages have risen by 2.5 percent over the last year.
When we factor in the shift from non-wage to wage compensation (mostly a reduction in health care benefits), this means there is essentially no evidence of wage acceleration whatsoever. The Employment Cost Index showed a rise of just 2.3 percent in compensation over the last year. If the average hourly wage for the last three months is compared with the prior three months, there is a bit more evidence with an annual rate of increase of 2.9 percent, but this is still very limited.
It is also worth noting that the labor share of corporate income is still far from recovering to its pre-recession level. It actually fell slightly in the third quarter, from 68.9 percent to 68.3 percent. While there is a modest upward trend in the labor share over the last two years, it is still more than 3.0 percentage points below the pre-recession level.
The somewhat slower pace of job growth could be associated with a speedup in productivity growth. Productivity grew at an annual rate of 3.1 percent in the third quarter, the fastest pace in two years. The quarterly numbers are highly erratic, and the 3.1 percent figure followed three quarters with negative growth, but it could be the beginning of an uptick in the growth rate. Productivity growth has been extraordinarily weak in this recovery, which is the reason that job growth has been relatively rapid in spite of weak GDP growth.
If the weak productivity growth is explained by the availability of low cost labor, which can be profitable to hire for low productivity jobs, then a tightening labor market would be expected to lead to more rapid productivity growth as workers switch from low paying, low productivity growth, to higher paying, higher productivity jobs.
Apart from the decline in the EPOP, most other data in the household survey was positive, most notably a drop of 220,000 in the number of people involuntarily working part-time to a new post-recession low. At the same time, those choosing to work part-time jumped by 327,000. This is likely a dividend of the Affordable Care Act with workers now having the option to get insurance through the exchanges so that they don't need full-time jobs to get insurance through an employer. This number is now up by almost 2.2 million from December 2013, the month before the exchanges came into existence.
The percentage of unemployment due to people quitting their jobs rose to 12.5 percent. This is a new high for the recovery, which is equal to the pre-recession quit rates, although it is still almost 3.0 percentage points below the peaks hit in 2000. The duration measures all showed moderate improvements, with the average and median durations of unemployment spells hitting new lows for the recovery.
On the whole this report shows a relatively positive picture of the labor market. Job growth is still proceeding at a reasonable pace although wage growth remains moderate. The big question is how many people will come back into the labor force, but with no evidence of inflation, there seems little risk in waiting for the answer.