Why the Unemployment Rate Refuses to Budge

In a sign that the labor market is inching toward a recovery, employers tacked a net total of 162,000 workers onto their payrolls in March, according to the Labor Department’s monthly jobs report.

But even with this spike, the unemployment rate remains unchanged at 9.7 percent. And chances are it won’t budge anytime soon. “We are recovering painfully slowly in the job market,” says Josh Bivens, an economist at the Washington, D.C.-based Economic Policy Institute. “[The March numbers are] essentially job growth consistent with a stable unemployment rate. So it’s good that they’re not consistent with a rising one, but it’s not the kind of job growth that we need to really start working off the jobs hole we’re in.”

Flooding the market. There are two monthly metrics that determine the rate of job growth. The main measure, which stems from a survey of employers, indicated that 162,000 jobs were created in March. But a second survey, which polls individual households, is the one that’s used to calculate the unemployment rate. That poll showed even more robust job creation–somewhere in the neighborhood of 264,000 jobs–for the month of March.

At first blush, it seems somewhat paradoxical that the unemployment rate is holding steady even as jobs are being created. But economists see the stable jobless figure as an indication that Americans are pouring back into the labor market in hopes that the economy has healed enough for them to find work.

The government measures unemployment by dividing the number of jobless workers by the total size of the labor force. But only people who are actively seeking jobs are considered to be part of the labor force.

As the recession tore through the job market, around 3 million workers dropped out of the labor force instead of continuing to search for employment. Now, as the economy rebounds, they appear to be returning en masse. “This looks to me like the return of those 3 million workers who dropped out of the labor force, and this is why it’s going to be very hard to drive the unemployment rate down,” says Bivens.

During a normal month, according to Bivens, the economy needs to add around 115,000 jobs just for the unemployment rate to remain stable. But with the burgeoning labor force, that number will likely be even higher in the coming months. In other words, for every worker who finds a job, there are new members of the labor force who are still looking for employment.

Notably, the number of job seekers who have been unemployed for at least 27 weeks shot up by 414,000 in March and now stands at 6.5 million. This spike suggests that as more workers join the labor force, the unemployed could face longer waits before getting hired. “People reenter the labor force, but they don’t get a job right away,” says Joshua Shapiro, the chief U.S. economist at the consulting firm MFR.

Ultimately, then, payrolls will need to expand far more rapidly for the unemployment rate to trail off. In fact, Shapiro expects the rate to get a bit higher in the coming months as the economy absorbs the onslaught of new job seekers. “It’s not necessarily a negative indicator,” he says of the potential for a return to 10 percent unemployment. “It’s just [a] reality.”

The good news. In anticipation of March’s jobs report, economists had predicted that the Labor Department would announce the creation of around 200,000 jobs. But even though the actual number came in below the target, there are still a number of encouraging trends.

For starters, private-sector job creation, despite a gloomy prediction earlier this week by ADP, was actually quite robust in March. Specifically, the Labor Department indicated that the private sector accounted for 123,000 of the 162,000 jobs that were created last month. Meanwhile, the public- sector job growth stemmed largely from temporary hires who are working for the Census Bureau.

Prior to the jobs report, it was unclear how many workers the government would bring on board to help with the census. According to Conrad DeQuadros, an economist at RDQ Economics, experts had overestimated the boost that the census would provide, and that’s the real reason the Labor Department’s numbers didn’t quite meet the 200,000 target.

“Despite the fact that the headline payroll number was below the consensus expectation…I still think the report was probably better than most people were expecting,” DeQuadros says, noting that in the private sector, nearly all of the major industries saw growth last month. Even hard-hit industries such as construction saw some modest gains. That industry tacked on 15,000 jobs, but construction workers are still experiencing an unemployment rate of close to 25 percent.

Meanwhile, employers across the board continued to load up on temporary workers. Last month, there were 40,000 private-sector jobs created in the temporary help category, bringing the total number of temporary workers hired since September up to 313,000.

“Especially when times are uncertain, as I think for a lot of businesses they are right now, companies would tend to hire temporary workers first before making those positions permanent,” says DeQuadros. “The fact that we’ve seen six straight months of employment gains in temporary help I think is encouraging in terms of it might be viewed as a leading indicator that more permanent hiring is coming down the road.”

Another positive indicator for the economy is that any signs of job growth generally garner a favorable reaction from employers, who are occasionally willing to take a more generous view of how many workers they need. At the same time, as more people get jobs and consumer spending increases, employers find themselves in a better position to hire. “I think you can get into this self-sustaining recovery dynamic in employment,” says DeQuadros.

Finally, the Labor Department revised its February statistics. It had initially been thought that the economy shed 36,000 jobs in February, but the department now says that the number was actually 14,000.

The big picture. All told, the recession has wiped out upwards of 8 million jobs since it began in late 2007. Meanwhile, with the unemployment rate still at 9.7 percent, the anemic job market is continuing to hold the economy back from a full recovery.

The unemployment rate peaked in October 2009, when it climbed to 10.1 percent. That’s up from 5 percent at the end of 2007. In other words, the economy still has quite a bit of healing to do before Americans can see a return to pre-recession jobless rates.

According to Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business, it would take 13 million new jobs between now and the end of 2013 for the unemployment rate to fall back to 6 percent. This kind of growth appears unlikely, particularly if new jobless claims keep pouring in at their current pace. Last week, for instance, there were 439,000 new jobless claims. “The [claims] are indicative of this jobless recovery,” Morici says.

Despite the lackluster employment scene, the market has continued healing in other areas. Notably, the rally that began in 2009 is still showing signs of life. The S&P 500, for instance, grew by 4.9 percent during the first quarter of this year. That represents the indexes best first-quarter performance since 1998.

Still, it’s hardly time to celebrate. This month’s job growth is “still far, far below what we need to actually start moving the unemployment rate rapidly down,” says Bivens. “We need to see a month of 250,000 or 300,000 [jobs created] and a couple of sustained months of that before we break out the champagne.”

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Posted in Employment, Finance.

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