Thoughts On The U.S. Labor Market

The eventful week concludes with key U.S. employment data due out Friday. It comes on the heels of a series of economic reports that were weaker than the consensus expected and points to a loss of momentum in late Q1 that is carrying into Q2.

Disappointing Data
Although the weekly initial jobless claims reported Thursday was counter to that pattern, which recorded new cyclical lows, weekly jobless claims were a bit higher. The employment component in the manufacturing ISM was lower. The ADP estimate was also disappointing. The 119k private sector jobs compared with consensus expectations of 150k and the March estimate was cut by 27k to 131k (the BLS initial estimate was 95k for private sector jobs).

Since the implementation of methodological revisions, there have been six reports before this week's. Three times the ADP estimate was above the BLS initial estimate for an average miss of about 45k. The other three times the ADP estimates were weaker than the BLS figure. The average miss was about 34k.

The Bloomberg consensus calls for a 155k net increase in private-sector employment. That would represent an increase from the initially reported 95k for March, which of course is subject to revision.

Downside Risk
Economists had generally under-estimated the strength of high-frequency data in early Q1 and by the time they adjusted, the U.S. economy began softening, which warns of a downside risk to Friday's jobs report. Yet even if the number is in line with expectations, it represents a clear slowing. The three-month average is 171k while the six-month average is near 201k.

Although the March jobs data disappointed, the fact that the work week increased by six minutes may have helped mitigate economic impact. The increase in hours worked, which matched the cyclical peak, coupled with the rise in temporary workers, was seen by some as suggestive of positive underling dynamics. Slippage in April aggravate any disappointment headline figures.

Participation Rate Decline
One of the big mysteries surrounding the U.S. labor market has been the decline of the participation rate. Last year, the participation rate fell 0.4% to 63.7%. The decline in the participation of 25-54 year olds was only partially offset by the increased participation among workers 55 and older. There seems to be both cyclical and structural aspects. Market participants appreciate in a way they may not have before the crisis that the unemployment rate says more about the participation rate than job creation itself.

Even more broadly, there seem to be cyclical and structural issues with the U.S. labor market. Consider, for example, that in recent years the U.S. has gained manufacturing jobs but continues to bleed clerical jobs. This would seem to be a reflection not of off-shoring, but of technological advances.

Disconnects
There also seems to be some skill mismatch. Reports suggest there are some 3.5 mln job vacancies in the U.S., yet high unemployment. There also appears to be another shift taking place in the U.S. labor market. Consider that in some 15% of taxi drivers have a college degree now compared with 1% in 1970, according to a recent essay by the FT's Edward Luce, who cited work by the Center for College Affordability and Productivity. A full quarter of sales clerks have a college degree compared with 5% in 1970 and 5% of janitors now have a college degree. And as Luce notes, almost half (46%) of those who go to college fail to complete the four-year degree in six years.