The 195,000 new jobs reported for June was somewhat better than most economists had expected. The job gains, together with upward revisions to the prior two months' data, raised average growth for the last three months to 196,000. While this may lead some to be dancing in the streets, those who actually care about the economy may want to hold off.
First, it is important to remember the size of the hole the economy is in. We are down roughly 8.5 million jobs from our trend growth path. We also need close to 100,000 jobs a month to keep pace with the underlying growth rate of the labor market. This means that even with the relatively good growth of the last few months, we were only closing the gap at the rate of 96,000 a month. At this pace, it will take up more than seven years to fill the jobs gap.
It is easy to miss the size of the jobs gap since the current 7.6% unemployment rate doesn't seem that high. However, the main reason that the unemployment rate has fallen from its peak of 10% in the fall of 2009 is that millions of people have dropped out of the labor force and stopped looking for jobs. These people are no longer counted as being unemployed.
If we look at the employment to population ratio – the percentage of people who have jobs – this has risen just 0.5 percentage points from the low-point of the downturn. It is still down by more than 4.0 percentage points from its pre-recession level, and by 6.0 full percentage points from the peak hit in the boom of 2000.
After severe downturns in the 1970s and 1980s, we had months in which the economy created over 400,000 jobs. And this was in a labor market that was more than one-third smaller. That is the sort of job growth that we should be seeing after a recession like the one we saw in 2008-2009. Unfortunately, such growth is nowhere in sight.
Of course, the weakness of the job market is not a surprise. The economy has been growing at less than a 2% annual rate for the last three years. In this context, it is surprising that we are seeing job growth of even 100,000 a month. Most analysts put the economy's trend rate of growth in the range of 2.2-2.5%. This means that the economy has to grow at this pace just to keep the unemployment rate from rising.
The reason that we have been able to able to achieve above-trend growth in employment in an economy growing much slower than its trend path is that the rate of productivity growth has fallen through the floor. Productivity growth has averaged less than 1% in the last three years, as opposed to 2.5% in the decade preceding the downturn.
This gets to the type of jobs that have been created in the upturn. Over the last three months, three sectors – restaurants, retail trade, and temporary help – have accounted for more than half of the jobs created. These sectors offer the lowest-paying jobs, with few benefits and little job security.
The fact that these sectors are growing rapidly speaks to the state of the job market. These sectors always generate lots of jobs, but in a good economy, no one will take them. Workers take these jobs when there are no better alternatives available.
The poor quality of jobs shows up in the wage data. The most recent data did show an uptick in the average hourly wage, which has been rising at a nominal rate of 2.1% over the last three months. This is somewhat better than the rate of