July 2, 2004

July 2, 2004 | WebMemo on Economy

Flexibility, Quality, and Numbers: The Job Market Is More Than onTrack

"Labor market conditions have improved." So proclaimed the Federal Reserve this past Wednesday. Today's employment situation report from the Labor Department is more proof that the job market is solidly on track.


June's preliminary payroll number of 112,000 came in at about half the expected gain of consensus projections. This is likely to be seized by naysayers as proof that the expansion remains anemic. Nothing could be further from the truth. For a variety of reasons, the better survey of labor market conditions is the household survey, and it reports another record level of employment this month-for the first time ever, more than 139 million Americans are working. Since December 2000-when total U.S. employment was 137.6 million according to the household survey data-the economy has created 1.4 million net jobs.


By the Numbers

The labor force continues to expand. June saw another large influx of new workers, 305,000 of them, into the labor market, reflecting increased confidence in the economy. Over the past two years, nearly 2.5 million individuals have entered the labor force.


Despite this great expansion, the unemployment rate remains impressively low at 5.6 percent. Unemployment as a percent of the growing labor force has been steady at 5.6 percent for all but one month of 2004. By way of comparison, the average unemployment rate of the 1990s was 5.8 percent. That the economy continues to accept so many new workers with such ease is remarkable.


Payroll Growth

The economy added 112,000 payroll jobs in June, marking the tenth straight month of payroll employment growth. Over the past year, the economy has added nearly 1.5 million payroll jobs.


All service-providing sectors expanded, save government. Leading the payroll gains were two high-paying sectors: professional and business (+39,000), and education and health (+37,000). Critics will say that professional services includes temps, but temporary workers gains were less than one third of the net growth in that sector, and it is an error to assume that temporary jobs are sub-par.


The larger trend in the American labor force is summed up in a word: flexibility. That is partly reflected in temporary positions in which both the employer and employee can assess one another during a trial period-a matching model that is often utilized by highly valued software programmers. The trend also appears in the relentless surge in workers who prefer part-time employment, currently 19.5 million. In fact, there are 150,000 more part-timers by choice than one year ago, and 100,000 fewer part-timers who prefer full-time jobs.


For many workers, today's economy offers unprecedented flexibility, and that includes a variety of part-time work options.


While employment in manufacturing slipped in June by 11,000 jobs, the overall outlook for the sector is still bright. According to the Institute of Supply Management, which released its widely cited "Report on Business" yesterday, the industry continues to expand at a rapid clip and companies plan to hire in coming months. Durable goods manufacturing actually posted a small gain-3,000 jobs-which was offset by a 14,000 drop in nondurables. This breakdown is significant for two reasons: durable manufacturing includes machinery, computers, and other equipment that are the inputs to further business expansion and the durables sector tends to attract higher-skilled labor and creates higher-paying jobs.


Gains in transportation and warehousing are similarly encouraging. The sector added 19,200 positions in June, led by gains in ground transportation. Despite a spike in gas prices during the month and thus higher costs, companies increased their use of ground shipping. With gas prices already beginning to fall, strong gains in this sector could continue for several months.


While the payroll data can tell analysts about the composition of jobs, it is riddled with complications and double-counting due to its indirect methodology. Most importantly, the payroll survey simply ignores the growth in self-employed workers and microbusinesses. A Heritage study in March (see "Diverging Employment Data: A Critical View of the Payroll Survey") quantified the illusion of lost payroll jobs due to declining turnover at roughly 1 million. The Congressional Budget Office notably shifted its attention from payroll data to household data with this year's published Economic Outlook. The growing consensus of economists is that the payroll survey won't be an equivalent gauge of labor markets until after its benchmark revision, which will occur in January 2005.


The Bottom Line

Today's report reflects the strong and steady growth that has characterized the U.S. economy for several quarters now. With recently improved earnings growth and continuing expansion, the labor market should continue to pick up steam for some time.


And as described in a recent Heritage paper (see "How Good Are the New Jobs?"), American jobs are better today and getting better every year. Average real earnings are higher today than in January 2001. The service sector is booming, but today's new hires aren't burger flippers. Increasingly, they hold professional positions, and increasingly, workers are choosing to be self-employed.


In all likelihood, employment-as reflected in both the household and payroll surveys-will continue to expand unless Congress decides to meddle with a good thing. Raising the minimum wage would be such a mistake, as would be expanding or extending unemployment insurance. Instead, Congress should look at what it's done right to help the economy-specifically, the 2001 and 2003 tax cut packages-and extend the President's tax cuts before they begin to expire in January 2005 (see "When Would the President's Tax Cuts Expire?").


Tim Kane is Research Fellow in the Center for Data Analysis at The Heritage Foundation.

About the Author

Tim Kane, Ph.D. Visiting Fellow
Center for Trade and Economics (CTE)

Related Issues: Economy