Unemployment Down, But February Jobs Report Not All Rosy

The report had some positive news, as the unemployment rate fell to 7.7%, the lowest rate since December 2008.

While the preliminary numbers for February show that 236,000 new jobs were created, exceeding analyst estimates by a wide margin, the figure for January was revised down from 157,000 to 119,000. However, the December number was revised up from 196,000 to 219,000. So for the three months of December 2012-February 2013, the economy has added a total of 574,000 jobs, well above expectations.

But despite the increase in the number of jobs, the main reason for the decline in the unemployment rate is that fewer people are participating in the labor market.

The participation rate fell by 0.1 percentage points to 63.5% in February as 130,000 people dropped out of the labor force. The employment-population ratio remained flat at 58.6%.

Collapse in Employment-Population Ratio

Brad DeLong, a professor of economics at the University of California at Berkeley, commented on his blog, "There has been no closing of the output gap and no decline in the unemployment rate from putting a greater share of the adult population to work. All of the decline in the output gap and all of the decline in the unemployment rate is from the collapse in labor force participation."

DeLong referenced the employment-population ratio since 2000, and the collapse in employment since 2007 is staggering. The employment-population ratio moved between 62.0% and 64.5% until 2008 when it collapsed to just above 58%, where it has remained since.

"It is true that demography would lead us to expect labor force participation to fall by between 0.1 and 0.2 percentage points per year," DeLong continued. "But even over 3.5 years that 0.5 percentage point decline in potential labor force participation is absolutely dwarfed by the 5 percentage-point decline in the employment-to-population ratio: one-tenth of our labor market shift relative to 2007 can be attributable to demography; nine-tenths are the result of the Lesser Depression."

Given that so much of the population remains unemployed - and that is not even counting the 8 million people who want to work full-time but can find only part-time employment - it's hard to see how even February's positive numbers are going to lead to a recovery in the overall economy.

Despite this month's improvement, those who have full-time jobs and decent incomes are doing very well while those who are unemployed or underemployed are doing badly.

Although the private sector added 246,000 jobs, governments shed 10,000 workers during February. The bulk of the decline at the state and local government levels were cuts in education employment, primarily teachers. Several analysts noted that the decline in government jobs has had a big impact on the overall labor force.

The Sequester's Impact on the Jobs Report

Nigel Gault, chief U.S. economist at IHS Global Insight writes, "The private-sector news on the economy continues to be good, and we would be upgrading our forecast of 2013 growth slightly were it not for the federal spending sequester that began on March 1. The sequester will not derail the recovery, but it does slow it down. We now assume that the sequester remains in place through June (previously we had assumed that it ended early in the second quarter). Overall, our sequester assumption takes about 0.3 percentage point off 2013 growth, compared with a "no-sequester' alternative."

The report also showed wage growth was better than expected as average hourly earnings for all workers rose by 4 cents to $23.82. The average workweek for all workers increased by 0.1 hours to 34.5 hours while the average workweek in manufacturing increased by 0.2 hours to 40.9 hours. Some analysts are suggesting that this increase in manufacturing overtime may lead to new hiring in March.

In the private sector, the report showed, employment grew in professional and business services (72,000), construction (48,000), health care (32,000) and retail (24,000).

Overall, the decline in the unemployment rate masks continued difficulty in the overall jobs market. More people are leaving the workforce and it is unclear whether they will ever return.

While the increasing number of Baby Boomer retirees makes it unlikely that the employment-population ratio will return to the lofty levels seen back in 2000, it does need to get back above the 60% level before we can say that the economy is really back on track.

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