Employment Rate Falls, Despite Strong Job Growth

November 02, 2007

November 2, 2007 (Jobs Byte)

by Dean Baker

Declining restaurant sales, coupled with strong job growth, implies plunging productivity.

The employment rate edged down to 62.7 percent, the lowest rate since June of 2005, even though the establishment survey showed the economy adding a stronger than expected 166,000 jobs. The job growth was concentrated in restaurants, health care, and temporary employment. The three sectors together accounted for 70.2 percent of the job gains reported for the private sector in October.

While the jobs numbers reported in October are surprisingly strong, most of the other information in this month’s report is considerably less positive. The drop in employment rates is especially discouraging. This decline has been an ongoing trend since the end of 2006, with the employment to population ratio (EPOP) down by 0.6 percentage points over this period. This drop is being driven by younger workers, as people over age 55 continue to work in growing numbers.

Workers between the ages of 35 and 44 have experienced the sharpest drop in EPOPs, falling 0.8 percentage points from 81.5 percent in January to 80.7 percent in October. This is a full 2 percentage points below their peak EPOP of 82.7 percent in 2000. The falloff for men over this period has been sharper than for women, with EPOPs for men falling 0.8 pp over the last year, while EPOPs for women are down by just 0.2 pp.

Consistent with the reported decline in EPOPs, the percentage of unemployment attributable to job leavers also fell to 10.9 percent in October. This is lowest level since January of 2005. This measure is generally viewed as an indicator of workers’ assessment of their labor market prospects, since workers will not voluntarily leave a job unless they are confident that they can find a new one.

While the aggregate job growth numbers in the establishment survey were healthy, the overall picture here is not very bright. Even with this month’s growth, the private sector has generated an average of just 78,000 jobs over the last three months. Several important sectors are now losing jobs, notably retail trade, construction, and manufacturing.

Retail trade lost 21,500 jobs in October, bringing job loss over the last three months to 38,000.  Residential construction lost 21,500 jobs, as the housing slump finally seems to be affecting employment in this sector. The sector has lost 76,500 jobs in the last three months. Manufacturing employment fell by 21,000 in October and is down by 83,000 since July.

Remarkably, the real estate sector is still reporting job gains, adding 2,100 jobs in October. Some of the gains in other sectors also seem peculiar. Restaurant employment reportedly increased by 36,700, following gains of 55,100 over the prior two months. The job growth is surprising since the Census Bureau reported that nominal sales were essentially flat between July and September, implying a decline in real sales. Declining sales, coupled with strong job growth, implies a rapid decline in productivity in the restaurant sector. The temporary help sector added 20,200 jobs after shedding 53,500 jobs since April.

It is possible that these seeming anomalies are explained in part by the Labor Department’s imputations of jobs for new firms. Roughly the same number of jobs is being imputed this year as last year. The preliminary benchmark revision showed that this imputation was almost 300,000 too high, an average of 25,000 per month. If the economy is growing at the same rate this year as last, then we can assume that the establishment data currently overstate job growth by roughly the same amount. 

One final item suggesting weakness in this month’s report is an apparent deceleration of wage growth. With a downward revision to the wage data reported for September, the average hourly wage has increased at just a 3.57 percent annual rate over the last quarter. This is down from a rate of more than 4.0 percent earlier in the year.

On the whole, in spite of the healthy job growth reported for October, it looks as though the labor market is weakening by most measures. With house prices continuing to fall at a rapid pace, it is virtually certain that the rate of deterioration will increase in the months ahead.

Dean Baker is the Co-director of the Center for Economic and Policy Research. CEPR’s Jobs Byte is published each month upon release of the Bureau of Labor Statistics’ employment report. For more information or to subscribe by fax or email contact CEPR at 202-293-5380 ext. 102, or morgavan [at] cepr [dot] net.

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