The October Jobs Report from the Bureau of Labor Statistics (BLS) came out last Friday, and it was incredibly positive. 204k jobs were added by the official measure, enough to send the stock market up and make everyone happy. Well, not everyone. There were some strange features in this report that only accelerated the criticism of this report that started the month before and sharpened the political debate over jobs in the new economy.
Much of this is long overdue, but some of the criticism was weak and pointless all the same. Labor force participation has fallen from 63.2% of all workers to a 35 year low of 62.8% – a figure that may or may not be important. And anyone paying attention to the ADP Employment report has to question where the great news came from seeing as the latter had a gain of only 130k jobs. What on earth is going on?
The short answer is that everyone is starting to question everything. It’s a good thing – if we can sort it all out. Let’s give it a try.
The first problem to tackle is that terrible divergence from the ADP Report. It’s best shown in this chart from the St Louis Federal Reserve since the dark days of 2010. The Official BLS report is in blue and the ADP report in red, and the divergence is pretty strong. The last time they diverged like this was … just last year, in fact, and it turned out that the BLS report was more accurate.
Time will tell if that trend continues, but it needs explanation. It’s a head-scratcher. Let’s just say that things are probably looking up and hope for the best for now.
But the net loss of workers as a percent of the population is much easier to understand – or so it seems. We can expect the labor force participation rate to continue to fall as the Baby Boomers start to retire, as we’ve predicted many times before. Is that all there is? The short answer is yes, of course, but you wouldn’t know it from many of the reporters covering the story. There is reason to believe that the workforce participation rate will keep falling now that those born when the peak births started in 1948 are hitting 65 years old.
Beyond these serious questions about the data, however, there is a real debate about what we are measuring and what “jobs” mean in the new economy. A paper delivered by some of the researchers at the Federal Reserve to the International Monetary Fund (IMF) conference in Washington last week highlighted the terrible deficit created by a lack of a job creation policy from 2007 until today. It was highlighted brilliantly by Paul Krugman, who is attending the conference.
In essence, the problem in our economy is not a lack of capital to invest, it’s a lack of opportunities worth investing in. And that was caused by a steep drop in demand fueled by chronic long-term unemployment that has probably shaved a total of 7% off of our GDP that will never return. In economic speak, the authors of the report were pretty blunt in their conclusion:
We have argued that the case for aggressive policy is strengthened further by the likelihood that much of the supply-side damage is an endogenous response to weak aggregate demand. As our simulation analysis illustrates, optimal monetary policy becomes noticeably more accommodative in the wake of a major financial crisis if the natural rate of unemployment and trend labor force participation are subject to hysteresis-like effects that policy can potentially mitigate.
Translating into ordinary English – the Fed policy of buying $85B in mortgage backed bonds is justified by being far too slow to respond earlier and create jobs to stimulate demand. Far too many people are unemployed and until that is corrected there will not be either rapid growth or inflation.
This explains why the Federal Reserve is pursuing this policy despite reasonable evidence that the economy has rebounded to the point where it is not necessary – they are trying to make up for the lost growth that we didn’t have over the last 6 years. The economy was wrecked – and even though it’s close to an even keel now, there is a lot of ground to make up.
Is that the real reason that worker participation fell so sharply? It seems unlikely, but there’s no doubt that we aren’t growing as fast as it would seem we could. And that’s the bigger fight that has come out of this jobs report – the one that will stick with us for a long time to come. It’s not clear that this one report really told us that much, but if it gets the long-stifled debate going it’s worth it.