August 8, 2022

US employers added a staggering 528,000 jobs in July, much more than expected, and wages jumped higher than expected – yet the number of people working or looking for work fell. where is everybody?

The Labor Department said Friday that the size of the workforce fell by 63,000 in July, despite the population’s growth of 177,000. The labor force participation rate – the percentage of people working or looking for work – fell by a tenth of a percentage point to 62.1 percent.

The enigma of shrinking labor force and declining workforce participation is one of the continuing puzzles of post-pandemic recovery. The labor market has been so strong – so much so that many believe we can’t be in a recession despite two consecutive quarters of negative economic growth – but that somehow hasn’t attracted a larger share of Americans into the labor force.

“I can’t have a client meeting without someone asking me where all the workers have gone. Credit Suisse analyst Zoltan Bozar wrote in a note to clients on Monday, I have no idea, but they seem to have disappeared.

Jason Furman, an economist at Harvard University and a former adviser to the Obama administration He said On Friday it was “puzzling” from the July dip.

There’s also another mystery going around here, which is almost a mirror image of what baffles Foreman. The household survey says the number of employed people increased only by 179,000, and the employment-to-population ratio jumped only 0.1 percent. Where did all these workers come from in July if the participation rate did not rise and the overall level of employment grew hard? Just as we don’t know where the workers went, we don’t know where they came from.

A short tour of the history of the modern workforce

Travel restrictions, business closures, and coronavirus concerns led to a collapse in workforce participation in the spring of 2020. We hit the 60 percent level in April, but rebounded quickly over the next three months. But in the summer of 2020, the recovery stalled. Recruitment grew rapidly during October but not participation.

Participation got a second boost in the spring of 2021 when vaccines were introduced, and after a few months employment began to rise rapidly again. Then we hit another air pocket, which may have been linked to the higher numbers of infected people and the schools staying closed. The reopening of schools and a decline in infections led to a third increase that began in November 2021 and continued until March of this year.

After the March peak, participation began to decline again. It is noteworthy that job growth peaked in the previous month. Until this month, job growth as measured by the salary survey was at its slowest pace in more than a year. Part of the decline in participation may simply be a slower pace of job growth.

Another strange thing started in March 2020. Although we are still adding jobs, the level of employment as measured by the household survey is consistent. This is the survey that the Department of Labor uses to determine the unemployment rate, participation rate, and other demographics around who works. It is created by asking families about the status of their work. It differs in different ways from the salary survey, which asks businesses, nonprofits, and governments about employment, hours, and wages. (You can read about the differences between the surveys over here.)

Luring freelancers into the payroll

When you do a household survey along with a salary survey, you will notice a few things. First, the household survey showed a higher level of employment than the salary survey. This is because it includes agricultural workers, self-employed workers whose businesses are unincorporated, people on unpaid leave from work, and unpaid family workers. The payroll survey counts only the people on the nonfarm payroll (also called the enterprise survey).

Second, you can see that the household survey shows employment growth stalled in March. Business has been adding to the payroll, but the general level of employment has not gone up. The best explanation for this is that companies are attracting more workers than what financial experts call margin; But instead of hiring people who don’t work, they’re hiring self-employed people. Workers are drawn to outside employers’ payroll from their own businesses. Also, some people who drop out of the workforce are being replaced by new entrants, keeping the employment level steady.

We can see this in the self-employed data in the Household Report. The number of self-employed workers shrank in July by 279 thousand. On the five-year chart, we can see that self-employment collapsed during the pandemic spring and peaked last August. It has been declining rapidly ever since, likely because many workers are switching from self-employment to payroll.

This solves the secondary puzzle of where all the workers we add to our payroll come from.

The decline in labor force participation is chronologically aligned with the flat line of the employment level, indicating a possible link. Salary growth by itself may not be enough to encourage workforce participation to rise. The level of employment as measured by the household survey may be what really drives participation now. One possibility is that self-employment opportunities or rewards contract, pushing some workers off the payroll and some out of the workforce altogether.

Real wages are declining

Inflation may also play a role. Although nominal wages have risen, they have not kept pace with inflation. So real wages are declining. This makes giving up free time for work less urgent on the sidelines. Essentially, employers are giving workers less money to work than they were before, which means that more people who don’t completely need to work will choose not to. The freelancing party might not be worth sticking with if your clients aren’t paying you that much in real terms, so you decide to quit, so to speak. Or maybe you are a young man who decides to put off your search for paid work until wages improve. In short, the real return on labor has decreased, so some people choose not to invest their time in it.

If it is silly to say that people will choose not to work because prices are rising, then keep in mind that unemployment is very low and the level of employment is almost at an all-time high. People are more likely to relate to someone with a job than at any time in recent history, and those jobs seem very secure at the moment. This makes it easier for a small percentage of the population to decide not to work.

Keep in mind that the workforce shrank by only 63,000 in July, so we’re not talking about a mass exodus of workers.

The role of seasonal adjustments

From work also considering that the labor force participation rate didn’t really shrink in July, and payrolls didn’t grow by 528,000. Before seasonal adjustments, the participation rate rose from 62.5% to 62.6%. The salary figure has shrunk by 325,000. This is not common. The key numbers you read are adjusted seasonally to smooth out the month-to-month differences in employment so as to give us a better perspective on the health of the economy. What the seasonal adjustments for July tell us is that the economy is expected to lose a lot of jobs in July, and this year it didn’t lose much. On the chart of non-seasonally-adjusted payroll growth below, the big drops are January, when payrolls shrink after the holiday, and the small drops are in July. The contraction in July payroll for this year was the second-smallest contraction since the 314,000 payroll contraction in 1966, surpassed only by the tiny contraction of 41,000 last year.

In other words, it was a very strong report for July even if you ignore the seasonal adjustment.

Likewise, the seasonal adjustment tells us that the workforce participation rate is expected to jump in July, which it usually does this year. But this year’s jump was smaller than usual, so it’s seasonally adjusted for a dip. The chart below shows the unadjusted labor force participation rate. Both nails the month of July.

The decline in real wages along with very low unemployment has increased the opportunity cost of working. So the number of workers is not keeping pace with population growth, which results in a low participation rate and keeps the level of employment constant even as payrolls grow rapidly.

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