Waldman on Jobs

This week’s labor market reports were almost as bleak as the weather. If anyone was not aware or simply doubted that we have a big problem with a deteriorating productivity picture, then the report for the first quarter of 2016 should have dispelled all doubt. Nonfarm labor productivity growth (the broadest measure of productivity for the U.S. economy) slid at an alarming 1% on an annualized basis during the first quarter. A four-year moving average of nonfarm labor productivity growth is approaching post–World War II lows. While there are not as much data by sector, manufacturing productivity growth is at a 25-year low—or worse.

Abysmal productivity performance partially accounts for what has been a strange dissonance between broad economic weakness in recent quarters and strong job gains. For any given level of demand, more workers are needed to produce if output per worker is weak. But economic weakness seems to now be overcoming productivity weakness to produce a softening in job growth during April. Net nonfarm job gains slowed to 160,000, the weakest since September. Job gains in the manufacturing sector, consistently hurt by negative global forces, were a meager 4,000, although that is certainly an improvement from a loss of 16,000 in February and 29,000 in March. The only real gains in factory sector jobs in April were in motor vehicles.

Structural issues continue to make labor supply a difficult problem, one that is unique to the current period. Since September there has been a slow increase in the labor force participation rate, a much-discussed trend given that labor force participation has been hovering at its lowest level since the late 1970s. But the labor force participation rate slid once again in April. To add to the growing imbalance in labor supply, the human capital stresses in the labor market are significant. As shown in the April report, the unemployment rate for those with a B.A. degree and higher is 2.4%. For those who only have some college or an associate degree, it is 4.1%. That remarkably wide gap partially reflects a consistent fall in the labor force participation rate for those with a B.A. degree and higher. It is a growing scarcity that is affecting productivity, wages, and overall competitiveness.

The general softening of job growth in April is the least of all concerns raised by this week’s data. Employment numbers have a natural volatility and some softening could be expected on the heels of an extended period of solid gains. But significant labor productivity weakness that is feeding into broad economic weakness at a time when all of the normal policy levers are in a compromised position creates a murky short-term outlook for U.S. growth. And the weakening of labor supply, human capital supply, and labor productivity gives rise to an unpleasant outlook for the long-term.