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The 2 Metrics to Watch in the Jobs Report

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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Not so long ago, the number of jobs created in the prior month was considered the single most important piece of information in the rich set of employment data released by the U.S. Bureau of Labor Statistics on the first Friday of every month. More recently, the focus shifted to wage growth as it became apparent that the economy had recovered its employment mojo.

QuickTake Monthly U.S. Jobs Report

Now both these metrics should take a backseat to the measure of labor-force participation and the related employment-population ratio.

After steadily increasing over several decades, these two measures of the size of the U.S. labor market plunged as a result of the recession induced by the 2008 global financial crisis. As late as last year, both metrics remained at or near their multidecade lows.

The civilian labor force participation rate reached a recent historic low of 62.4 percent in September 2015, a full seven years after the eruption of global financial and economic instability. This compares to 66.2 percent at the beginning of 2008. In the most recent data, contained in the jobs report for February released a month ago, it stood at 62.9 percent.

Meanwhile, the employment-population ratio (for those 16 and over) fell from 62.9 percent at the beginning of 2008 to a recent historical low of 58.2 percent in January 2011. It has recovered somewhat, but, at 59.8 percent in February of this year, it also is well short of where it was and could be.

Economists have not come to broad agreement about the causes of these movements. Some favor structural factors, such as demographics and the impact of technological innovations. Others believe that more cyclical forces, including insufficient aggregate demand, have played a determining role.

It is hard to see analytical breakthroughs that would resolve this important debate any time soon. As a result, the data itself will be critical, including whether the small bounce in both metrics gains momentum.

The potential implications of how this question is answered extend well beyond the future economic well-being of the U.S. and the related social and political dimensions. They also speak to the challenging policy assessment facing the Federal Reserve -- namely, the likely mix of “benefits, costs and risks” as the central bank continues to use unconventional monetary policy to stimulate the economy. Moreover, market participants will be watching closely, given their dependency on Fed support and its impact on the size, sign and volatility of future investment portfolio returns.

In a perfect world, we would observe a continued steady rise in both labor force participation and the employment-population ratio. This would strengthen the engines of economic growth and prosperity. It would enable the Fed to continue to support the economy in the short-term in a manner than allows more inclusive growth and lowers the probability of an inflation surprise that would force it to hit the brakes in a potentially disruptive manner; and it would make it easier to carry out an orderly normalization of monetary policy. Such data developments also could deliver a necessary component of the scenario that would help validate existing stock market prices while strengthening the foundation that would allow them to go higher over time in a sustainable fashion.

Of course, these issues will not be answered only by the employment report for March that will be released on Friday. A series of additional monthly data observations will be needed, as was the case for determining -- over the past three years -- that the U.S. economy had re-established its pre-crisis standing as one of the most powerful generators of new jobs in the global economy. But these two metrics should move to the forefront of the reporting and assessment of the monthly jobs report.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net