December jobs report shows economy at, or near, ‘full employment’

As the recovery from the Great Recession has taken root in the last few years, we have seen a pattern of generally improving job market numbers that generate an impression of a moderate, but uninspiring economic improvement.

Even for professional economists, the numbers have been hard to interpret clearly. Economists are used to looking at sets of data that do not point in the same direction, but the U.S. labor market has been uniquely opaque.

The one number that most people are used to looking at in the Department of Labor’s monthly jobs report, the unemployment rate, is now down to a level that economists are used to calling “full employment.” The 4.7 percent rate recorded in December 2016 is generally agreed to be near the lowest level our economy can sustain without generating increased inflation.

{mosads}Economists, a notoriously fractious tribe, disagree on what the full employment level is, but few believe it is much lower than the 4.7 percent.

At the same time, the feeling remains that something is rotten in the state of the U.S. labor market. One indication of rot is the still relatively large number of people working part time but wanting full-time work.

According to the Bureau of Labor Statistics’ estimates, 5.6 million people fell into that category. That is far fewer than in the aftermath of the recession.

A rough calculation based on January 2006 data, before the housing market crashed and the financial system imploded, indicates that Friday’s number is about 25 percent higher than in the good old days. In other words, about 1.4 million people more than “usual” are working part time, but seeking full-time work at present.

It is important to remember that the U.S. labor force is comprised of roughly 160 million people. This means that less than 1 percent of the labor force consists of part-timers seeking full-time work.

Are there other pockets of underemployment that stand out? Another category to look at is discouraged workers who are willing to work, but are not actively seeking work.

In fact, this category no longer seems unusually large. Many workers were discouraged as little as 2 years ago, but strong job growth in 2014 and 2015 has significantly decreased this category.

The other indicator that seems to explain the persistent economic malaise has been wages. Wages have not bounced back strongly during this recovery. Here, the new job report has good news — wages were 2.9 percent higher in December 2016 than in 2015, the strongest increase since before the Great Recession.

There is reason to expect increased wage growth next year as well, partly due to tightening labor market conditions, and partly due to increased minimum wages in no less than 19 states.

Where did the new jobs come from in December? The biggest increase came in the healthcare industry. During 2016 as a whole, health care added 39,000 jobs a month, with December turning out a little better than average at 43,000.

Professional and business services jobs did not have such a great December, but during the whole year, 43,500 jobs were added in this sector per month.

Many of the jobs in these two steadily-expanding fields are fairly high-skilled and well-paid. But, for workers without a college education, such jobs are often hard to obtain.

Traditionally, manufacturing jobs have been the best opportunity for people without a college education to get a decent job. Manufacturing jobs fell by 5,000 a month on average in 2016, but did have a good December, gaining 17,000.

However, manufacturing jobs are requiring increasing amounts of education and skill as the increased use of complex, computer-guided equipment eliminates the more routine, manually-oriented manufacturing activities.

In the near term, it seems likely that the unemployment rate will stay fairly stable, but wage growth will accelerate modestly. There may not be a lot of room for the economy to create large numbers of new jobs.

While the economy could grow a bit faster, a big acceleration does not seem likely because there is not that much spare capacity left. Furthermore, with a strong dollar dampening exports, the economy faces headwinds that will be hard to overcome.

The policy discussion in Washington seems likely to focus on decreasing regulations, taxes and protections for workers. There has already been euphoric talk about raising economic growth through strong pro-business policies.

Perhaps companies will respond enthusiastically to this agenda, but one can doubt how much this will help those workers who lack the education and skills to get better jobs. Even if such reforms are enacted, they will take time to affect the economy.

Trade, and especially trade taxes, seem poised to play a big role in the new administration’s approach to jobs. The kind of retaliatory tit-for-tat tariffs threatened by President-elect Trump amount to a radical departure from the U.S.’s post-World War II free-trade agenda.

It cannot be assumed that other countries will passively sit by if the U.S. imposes such measures.

The last element of the administration’s approach is the potential negotiation of one-off “deals” to keep jobs in the U.S. The agreement with Carrier Corp. saved about 800 jobs.

It would take 1,750 such agreements to equal the 1.4 million part-time workers seeking full-time work. Even if President-elect Trump could make one deal a day for the next four years, he would fall short of this mark.

Even this comparison is inappropriate, however, since the Carrier deal did not create new jobs, but simply preserved existing ones.

The state of the U.S. job market reflects some highly problematic long-term trends, most notably, the steadily falling labor force participation rate that has vexed our economy since the early 1990’s.

It also reflects the damage done by our worst recession since 1929. The job market has healed a great deal since 2009, but getting to a better state will require thoughtful work to help the less-skilled and less educated.

Managing the challenges created by the “new economy” of online work and the increased tendency to treat workers as independent contractors  should be key concerns if we are to provide decent livelihoods.

In the years immediately following the Great Recession, a continued fiscal stimulus might have provided a quick, albeit partial, fix to the woes of the U.S. labor market. Now, that moment has passed.

An agenda of radical deregulation certainly will not help those who are working but earning too little. Nor will it provide the education, training and infrastructure needed for a sophisticated, knowledge-based 21^st century economy.

Evan Kraft is an economist in residence at American University. Kraft specializes in the economics of transition, monetary policy and banking issues. He served as Director of the Research Department and Adviser to the Governor of the Croatian National Bank.

The views expressed by contributors are their own and not the views of The Hill.