Monthly job numbers
from the Bureau of Labor Statistics (BLS) continue to surprise
economists, this time by moving in opposite directions than usual.
The rate of unemployment rose by 0.2 percentage points to 5.4 in
data released today, reversing its January decline, while payroll
job growth finally beat expectations with a solid increase of
262,000 jobs in February. The dissonance between the two top-line
indicators over the last year - tightening unemployment rates
alongside flat payroll growth - reveals deeper trends at work in
the economy.
The workforce is
aging, while society is getting wealthier and healthier. How these
forces shape labor supply cannot be known with certainty, but the
lesson for data watchers is clear: look at demographically neutral
indicators if your goal is to assess the macro economy. It does no
good to obsess over the total number of jobs if labor supply is
contracting because people simply feel wealthier. Likewise, a
booming number of jobs would be misleading if the cause is higher
birth rates from two decades ago.
Instead, the best
way to assess the health of the labor market itself is to measure
the number of jobs relative to the available labor supply. Meet the
unemployment rate. It is defined as the number of people who are
unemployed divided by the labor force of people who have or want a
job.
In February, the
unemployment rate nationally was 5.4 percent, in line with what
economists call the "full-employment" or "natural" rate. During
President George W. Bush's first term, which included a mild
economic downturn in 2001, the unemployment rate actually averaged
5.53 percent, which compares very favorably with the average since
Harry Truman's second term in 1948 of 5.67 percent.
A comparison of
unemployment rates during presidential terms in Table 1 shows that
the first Bush term was sixth best. Few of the five "better" terms,
however, included a recession, and all of them preceded recessions
because they reflected overheated economies - most notably under
President Lyndon B. Johnson in 1968 and President Bill Clinton in
2000. Few economists forecast a looming downturn as a result of
today's labor market.
The other
demographically neutral indicator to watch is the labor force
participation rate (LFPR). For men, the LFPR has been on a gradual
and steady decline for decades. For women, the rate has been
rising. Both trends reflect that today's labor market is different
than ever before. The big surprise in the data since 2000 is a
collapsing LFPR for teenagers, which hit an all-time low in
2004.
There are many
implications of this data, but the most important lesson is for
policymakers who are considering increasing the minimum wage. Such
a move may attract more teens into the labor force. But economists
also expect a mandatory wage increase to restrain the supply of
jobs. The inevitable result will be a higher unemployment rate,
which may not be the legacy President Bush wants to build for his
second term.
Tim Kane, Ph.D., is
Bradley Research Fellow in Labor Policy in the Center for Data
Analysis at The Heritage Foundation.