Employment Recovery Continues to be Sub-par

I have been having a debate with my friend Cody over the employment data for some time now. Cody explains the subpar job performance because this recovery cycle started with such high levels of employment.

I believe the data belies that belief. So I propose the following: I will present my charts showing why this recovery is so weak, and challenge him to present historical data or charts supporting his thesis.   

I rely on three aspects to demonstrate the weak jobs market: past recoveries, the present labor participation rate, and the flip side of LPR, and the "slack" in the job market.

We have noted previously how the Labor Market continues to underperform prior recoveries. As this chart from Northern Trust’s Asha Banglore shows, this has been a weak private sector jobs creation recovery:


Click for larger graph:


Source: Northern Trust

Not only has job creation lagged prior recoveries, but it appears to be flattening out at a point where in the past it was accelerating upwards. 

Banglore notes:

"Hiring in the current expansion is the weakest on record after four years of economic growth. The chart below is an index chart that measures growth in employment four quarters prior to the trough and 16 quarters after the trough. The payroll reading for the quarter when the recession ends is set to 100. For example a reading of 108 implies that payroll employment increased 8.0% from the level reported for the quarter when the recession ended.

Following this methodology, on average, in post war economic recoveries which lasted four years, payroll employment increased 11.6%. In the current economic expansion, hiring has increased only 2.6%. In the 1991 economic cycle, after four years of economic growth, payrolls increased 7.2%.

The current economic expansion could possibly end  with the fewest number of jobs created during an economic cycle in the post-war period."

How does that square up with the 4.9% unemployment rate? As we have discussed all too many times in the past, the employment rate is a percentage, a fraction with total full time employed as the numerator, and total labor pool as the denominator:

Employment Rate =  Total Employed / Labor Pool

Unemployment Rate = (100 – Employment Rate)

For those of you who may have forgotten your fractions, a percentage can rise in one of two ways:  the number on top goes higher, or the number on bottom goes lower. When it comes to the employment rate, that means either more people getting jobs (good) or more people dropping out of the labor pool (bad).

Yet another Northern Trust analysis shows why the unemployment rate has dropped so low: its for the wrong reasons:


Click for larger graph:


Source: Northern Trust


Note that the past five years have seen the first major decrease in Labor Participation Rate since the post-war period under President Eisenhower — about 45 years ago.

Banglore explains further: 

"The labor force participation rate has dropped each year in the 2000-2004 period (see chart 1) and held virtually steady in 2005. This is an atypical event because during economic recoveries the participation rate rises as more people enter the labor force.

There is no conclusive research explaining the reasons for the downward trend. Studies have shown that the civilian unemployment rate would be significantly higher than the current estimate of 4.9% if the participation rate were to mimic the trend of previous economic recoveries. In other words, the current reading of the unemployment rate partly exaggerates that implied strength in the labor market."

Next up, Joan McCullough thinks about NFP and the impact on the Fed:

"Finally on Friday, the Big Kahuna, NFP:  Okay. We all know that the headline was lame but that the saving grace was the revisions. You can call it “mixed” if you need an adjective, but here’s what we should be focusing on: the rate looks good on the 6 o’clock news, 4.9%, right?  But that’s where it ends. Because the only reason it’s down there is owing to the shrinkage in the percentage of the population who are actively participating in the labor force (employed or lookin’). The peak of the recent cycle was March of ’01 when the LFPR was 67.2%.  It currently stands at 66%, flat y/y. 

Does this tell you anything? It should scream volumes. If there were no slack in the labor market, prospective employees would be entering it in droves, not staying away/dropping out. As for earnings, December showed a +3.1% gain y/y [below inflation]. Thus John Q. remains below water.   

So there you have it. A trash heap of data amid claims of the latest emergence of the bull market.  Which is the proper reaction if you espouse the “market rallies when the FED is viewed as finished” rationale."

Lots of slack in the labor market, little in the way of wage pressure,
employees working longer hours — and without overtime — hence, the
productivity miracle.

At the same time, we see average hours worked continues to increase.

If there were not so much slack in the labor market the productivity miracle would look far less miraculous: People would more readily be switching jobs; instead, they are scared witless about losing their employment — and even more importantly, their health benefits and medical insurance.

Back to the Fed:  I wonder how much impact they will have regarding inflation, considering their is no wage pressure. That’s one of the areas they have the strongest impact on. Overseas commodities demand is not an area they have much influence on, unless they induce a global recession.   


With this post, we add the category "Employment." (Hard to imagine this was never a subtopic . . .)

Payroll Employment Remains Soft Even After Four Years of Economic Expansion
Asha Banglore
Northern Trust Economic Research: Daily Global Commentary, January 09, 2006   

Noteworthy Aspects About the Participation Rate (2000-2005)
Asha Banglore
Northern Trust Economic Research: Daily Global Commentary, January 10, 2006 

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  1. B commented on Jan 11

    Does it not make sense that companies would be curtailing any hiring given the high levels of cash on hand? They just aren’t spending. If they aren’t spending, why would they be hiring at the levels of prior recoveries?

    Hmm….I thought companies were going to pick up where the consumer left off? If consumers quit spending and demand for product/services dries up, why would companies start spending? External stimulus is the only reason I could see.

  2. Adam Schierholz commented on Jan 11

    First of all, as this is my first time commenting I must commend you on a FABULOUS BLOG. I love your posts and read them religiously. They help me tremendously with my investing.

    That all being said, I have to take issue with something.

    Just about everything I read from you makes TOTAL sense to me. This does not:

    “If there were no slack in the labor market, prospective employees would be entering it in droves, not staying away/dropping out.”

    I just can’t fathom how people who need jobs would GIVE UP? Stay away from the market and/or drop out? Just totally illogical and counterintuitive. Contrary to Maslow. I can go on and on. I just don’t buy it.

    Comment on this please. Convince me it could be happening, I just don’t think it can…ever. And I gotta think more of your readers have this same feeling. Thanks, and keep up the great work! Please!

    BR: Adam, I try to address your questions here: http://bigpicture.typepad.com/comments/2006/01/whos_dropping_o.html

  3. royce commented on Jan 11

    “Contrary to Maslow. I can go on and on. I just don’t buy it.”

    That’s an argument you should take up with the Department of Labor rather than Barry. They collect that data by survey.

  4. D. commented on Jan 11

    To get a better feeling for the average American Joe, I’ve read enough parenting blogs to know that, in the US, many women are staying at home not because they necessarily want to but because:

    1. they can’t find quality care
    2. where they can find it, the cost of it is such that the net take home pay doesn’t make sense financially, especially when weighing the extra income vs. quality of life
    3. they are sick of the rat race and the rise in real estate has permitted them to tap into some equity and has made them feel financially safer. In other words, if real estate dropped, maybe they’d get antsy and start looking for work.

    I have no idea how much impact this has had on the employment numbers but it’s definitely something that I have found striking. The US doesn’t do much for women. Bush wants American women to stay at home and it looks like this is what has been happening on his watch!

  5. Kate Labrador commented on Jan 11

    1. I think there are lots of consultants and others working out of their homes that are being picked up in the house hold survey that are being missed when surveying employment numbers at large corporations. Employment is changing dramatically in America.

    2. Large company productivity is increasing significantly thus they do not need as many employees. GDP growth is fantastic and there are problems finding employees in most regions.

  6. Norman commented on Jan 11

    I do a log regression of employment. From 1960 to 2001 employment grew at 2,2% per year; its been flat since 2001. Extending the regression line to 2005 means we should have 150.5 million people employed instead of our 134.5m so there is a massive 16m deficit of workers. Anyone have a thought on how those 16m got lost? Undocumented workers? That other approach to counting the employed? Effect of our 6% of GDP trade deficit? NAFTA? etc. Funny, I don’t read much about this.

  7. terry commented on Jan 11

    I think the real key to your argument is the stagnant state of real wage growth–there is very little competition for employees with exceptions for special skill sets. As a result labor market participation is down and a good number of those who historically would have been participants if there was a stronger market for their services are getting more education and/or living at home with their parent(s) long after earlier generations would have started their own households. While there may be a societal aspect to this, a better labor market would induce a lot of 20 somethings to get a job and move out.

  8. M1EK commented on Jan 11

    1. Employment isn’t changing dramatically; that’s a common excuse raised by those who don’t like the figures at that point in time. I work in a field where there ARE a lot of independent contractor types, but there aren’t any more now than there were ten years ago. File this with the “we can fix traffic by having everybody telecommute so we don’t need to invest in mass transit” and “we don’t need hybrids because fuel cell vehicles are coming any day now” fallacies – they’re misleading delaying tactics, not honest explanations.

    2. Participation rate decline – could this possibly be affected by the demographic bubble of early Baby Boomers approaching retirement?

  9. Tim commented on Jan 11

    I happen to agree with Cody and was planning to make up a few charts and write something on this. The chart from Northern Trust is misleading, as are many others, because it shows only a short period of time before the bottom, or in other charts I’ve seen they just start at the bottom.

    Not only the jobs build up prior to the recession, but the depth of the recession are significant factors that seem to be ignored when it comes to setting expectations for job growth after the recession.

    You can get a sense of this in the chart from this post that looks at job creation in California over the last 15 years.

    California Dreamin’

    It should be easy enough to compare the last two recessions, maybe more, to make better sense of this.

    BR: Tim, which chart is misleading? Its all BLS / BEA data . . .

  10. cm commented on Jan 11

    The first graph looks like a parametric function plot, with progressing parameter value pressing the function down.

  11. B commented on Jan 11

    Ok, I have to open my big mouth here. A couple of comments.

    I assume the majority of the people on here make a six figure income or better. Maybe not all but these posters are a very skewed representation of the top 20% of Americans. The bottom 80% have too many other problems to have free time posting on blogs.

    I come from a working class family. ie, I had dirt for breakfast when I was a kid. My family, extended family and friends ate alot of dirt too. I can assure every one who quotes statistics, damn statistics and lies that the average American is not overemployed or even employed at a level that they think this economic recovery is just fanstastic. I don’t need statistics. I stay very close to my roots and it is based on the real world. If anyone cares to differ, maybe you should look at the living condition of those in Katrina. PRE Katrina.

    There is a VERY CLEAR reason why the Misery Index is off the charts. And a very clear reason why approximately 50% of Americans believe we are in a recession. Even if those stats are off by 50%, they are incredibly high. The reality is most American’s lives are a very difficult slog.

    While Wall Street gets $21 billion in bonuses this year, most Americans are scrounging for money to pay for gas. That is why the savings rate is showing up negative…..although I don’t know that I believe the absolute reading of that statistic, I do believe savings are low for a majority of Americans if not nonexistent.

    A buddy of mine is the C$O for a major syrup manufacturer for leading coffee chains and they pay their factory workers $8 an hour. Opportunity for advancement? Yea right. They move up to head syrup maker for $8.35. They are not kids. They are working parents. They have a 401K plan that is an oxymoron because people do not participate. They can’t afford to put away 5% to get a matching dollar amount. ie, They are turning down free money. That is MISERY and it is common for the area of the country where manufacturing jobs were once plentiful. It ain’t in Mississippi. That plant is in Ohio in the Rust Belt where LITERALLY over 100,000 factory jobs have been lost since 2000.

    American company productivity? Of course. Much of that productivity is gained via outsourcing. Even outsourcing to American firms. The labor rates are always cheaper. GM to its suppliers. IBM to Kelly Temp Services and worst case to India, China, Brazil or Eastern Europe. Entire factories or divisions have closed and moved overseas. That is surely a productivity miracle but it isn’t helping create new jobs. Our current account deficity is significantly created by jobs moving overseas. Much of the imports are American company imports. Net, net is there are slim pickings for those without a specialized college degree.

    How do I know? Because I don’t read statistics. I see it. There are two Americas. The one most of us live in and the one most Americans live in. Will that trend continue or change? Who knows. But, these major trends where the top percentage accumulate wealth at the expense of the many always end. Always. There is no historical precedence to the contrary in any civilization. They take decades to end but they do. Sometimes with financial crises and sometimes via struggle such as when the American labor movement started the last time wealth at the top became so concentrated.

    If Cody wants to challenge my statistics, tell him to hop in the car with me and I’ll show him a slice of Americana.

  12. julie commented on Jan 11

    I feel that we probably never had the recession we should have had, but just delayed it.

    This economy has had the most massive amount of Keynesian stimulus since WWII. Taxes down, spending way up, there is 400 billion a year of stimulus right there.

    Then low interest rates, massive increases in the money supply partly fed by foreign loans.

    Then the money flowing into the economy from the real estate boom and the borrowing on it.

    Fiscal and monmetary we’ve raely had stimulus like this and yet growth is anemic compared to the end of most recessions. A 4% increase from fed reduced taxes/ increased spending, another 2 or 3% at least from home equity borrowing, another percent or more from new foreign money. Almost no multiplier.

    And a bunch of rightwngers calling this Keynesian fizzle an economic miracle.

    We should have 5 or 6% growth consdering the amount of stimulus and now it’s reaching the point were some of this stimulus is going to be withdrawn and even some is goinmg to have to be payed for.

  13. Tim commented on Jan 11

    Just to clarify my view for readers who are not familiar with what I have written on this subject…

    I think the jobs situation is horrible, but it’s not the quantity, it’s the quality – too many granite countertop installers and Starbucks baristas as a result of the housing bubble and the resulting wealth effect.

  14. JoshK commented on Jan 11

    Does anyone really have a handle on all of the illegal aliens working here? It seems like this number would do a lot to clear up everything. Considering the often repeated claim that it’s the smaller firms that start hiring first after a recession, that would imply that the marginal changes are happening first to a very difficult to report group.

  15. B commented on Jan 11

    On that note of illegal aliens…..We need more, more and more of them! Seriously, we need to keep the import spigot turned on full blast as it pertains to immigration. America’s economic miracle is really less of a miracle and more of a continuing population growth driven by immigration. Without it, we look like Japan, France and Germany. Stale and Stagnant.

    We want people to move here in droves. Bush needs to loosen these doggone H1B Visa restrictions post 9/11 amongst other recent restrictions in the name of Homeland Security. Oh, and quit tapping our phones without a court order. You can tap away all you want under court supervision. Immigrants pay taxes, they pay my Social Security (because our birth rate is too low to pay for future govt programs), they contribute to GDP growth and to new business creation. Immigrants are driven to achieve a dream they didn’t usually have in their own country and many typically want to do jobs Americans don’t. That isn’t just cleaning the toilet but includes science, research and engineering. They contribute to our university research in disproportionate numbers and our intellectual capital/innovation. Americans are all too focused on the quick buck and want to be in real estate or investment banking. How’s that for stereotyping? Any scientists or engineers on this board? Hardly. I’m likely the only one and I gave it up for the quick buck.

  16. JoshK commented on Jan 11


    Besides the contributions of immigrants, if we legalized their presence here, we’d probably do a lot as far as cleaning up the data.

  17. M1EK commented on Jan 11


    I’m an engineer (software). And believe me, opening the H1B spigot would be horrible for what remains of our middle class.

    It’s amazing to me that capital (management) is so strident about obeying the local laws of supply and demand when it comes to cutting wages (labor), but when labor occasionally gains a bit of an upper hand, all of the sudden the market must be gamed by increasing the supply of labor via tricks like the H1B.

  18. Barry Ritholtz commented on Jan 11


    This is showing the percentage gain for 4 Qs before the recession, and 20 Qs after — How is that inconsistent?

    There were tons of jobs created from 82-90, and the 1991 recession was shallow also. Yet the economy created much more jobs in that recovery then the one at present.

    Can you derive another way to depict recession recoveries, so they can be compared?

  19. Tim commented on Jan 11

    In answer to Barry’s question about which chart is misleading:

    The first chart – the change in payrolls.

    As an extreme example, say there were 50 million jobs created in the five years before the recession in 2001, but only 10 million jobs created in the five years before the recession in 1991.

    Also assume that In both cases there was a net job loss of two million jobs during the recession.

    It would seem reasonable to think that the rate of job growth coming out of these two recessions would be very different because of the differences in how you got to the recession, and how severe the recession was.

  20. Tim commented on Jan 11

    OK, now I’m one question behind.

    Not inconsistent, just misleading, as to what are reasonable expectations of job creation, given how you got to the bottom of the recession trough.

    I’ll make up some charts.

  21. Mike commented on Jan 11

    I have been blogging for the last several years about unemployment. The 4.9% rate is not even close to being accurate. In fact, it is closer to 8%. One must remember that, when the benefits run out, the individual is no longer considered unemployed. I have had numerous discussions with the BLS; however, they will not change the definition of being unemployed.
    If the labor market were getting tighter, the wage picture would look different. It is not tight and has not been tight. Before hiring a full-time worker, there would be more overtime paid. It is cheaper to pay overtime for two hours than to hire a full-time worker and pay benefits. In addition, in discussing employment, how many work for less than 32 hours and don’t get benefits? They are still counted as employed but cannot support themselves on one job. How many part-time jobs are held by one individual? How much double-counting is there? If one person holds two part-time jobs, that counts as two employed individuals.

  22. cm commented on Jan 11

    Mike: “when the benefits run out, the individual is no longer considered unemployed”

    This is patently false. The national “unemployment” number is the U-3 rate of the household survey essentially based on the question “have you made specific effort finding a job in the last for 4 weeks”.

    What is plausible though is that once unemployment benefits stop, and with them the requirement to plausibly certify/explain your job-seeking efforts to your local labor dept case worker, job-seeking probably trails off and people become discouraged workers, who are not included in U-3 but in U-6, which incidentally has been at 8-10% lately. (Table A.12 in the BLS report.)

  23. Chris commented on Jan 13


    Perhaps the lack of response to the stimulus is that the stimulus doesn’t actually work?

    Just a thought.

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