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Job Recovery Still Has Room to Run

Mark Whitehouse writes editorials on global economics and finance for Bloomberg View. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was previously the founding managing editor of Vedomosti, a Russian-language business daily.
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U.S. job growth rebounded in June from a brief slump that had many concerned about the outlook for the economy. The crucial question now: How long can it go on?

The employment report for June suggests that U.S. employers were doing well in the weeks before Britain's vote to leave the European Union. The Labor Department’s establishment and household surveys, conducted in mid-June, indicate that nonfarm employers added 287,000 jobs, bringing the three-month average to a robust 147,000 and helping keep the unemployment rate at a low 4.9 percent (up 0.2 percentage point from May, thanks largely to an increase in the number of people actively seeking work and hence counted as unemployed).

Economists, though, don’t expect this pace of employment growth to last. At some point, job gains must fall more into line with the natural growth in the labor force, which the Bureau of Labor Statistics estimates at about 65,000 people a month during the next decade. If hiring doesn’t slow, the competition for workers will eventually become so intense that wages and prices will spiral upward.

What everyone needs to know, then, is how many workers are still in reserve -- that is, how many more people employers can hire before they’ll be constrained by natural growth in the work force.

One way to get a sense: Look at the number of people stuck in part-time gigs or on the sidelines of the labor market, and estimate how many full-time jobs would be needed to bring that number back down to the normal or expected level. Judging from an analysis developed by the economists David Blanchflower and Andrew Levin, that employment gap stood at about 2.1 million in June. That’s pretty significant, but it’s down a lot from about 4 million a year ago. Here’s how that looks:

Another approach is to look at the share of the population employed, and figure out how many more jobs would be needed to bring it back to its pre-recession level. Focusing only on people in the prime working years of 25 to 54 (to strip out the effects of an aging population), this shortfall stood at 2.9 million in June, down from 3.7 million a year ago. Here’s a chart:

To be sure, there’s no guarantee that all these potential employees will actually materialize. Some may be so discouraged or their skills have eroded so much that they’ll never work again. Still, these two measures suggest that, in principle, job gains might be able to exceed natural growth in the labor force for another few years or even more. The longer they do so, the more they can reverse the damage done by the 2007-09 recession.

Other measures, too, suggest that the economy’s reserve of extra workers isn’t yet exhausted. The average hourly wage rose 2.6 percent in June from a year earlier -- well below the pace of previous expansions, indicating that demand for labor is not yet outstripping supply. Also, a lot of people are still joining the labor force every month, either to take a job or to look for one -- a sign that workers are available if employers want them.

In short, there’s no intrinsic reason for the U.S. jobs recovery to end anytime soon -- unless some outside force, such as a policy mistake or the repercussions of the Brexit vote, stops it.

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:
Mark Whitehouse at mwhitehouse1@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net