Guest Blogger Buck Klemkosky Slow and Steady Job Growth Not Enough

The U.S. Labor Department announced job growth of 215,000 for March in line with expectations. Given a working-age population of over 200 million, it doesn’t seem to be a significant number of jobs. But 215,000 new jobs are the net increase of many moving parts.

Annually, the U.S. creates a little less than 13 million jobs, but also destroys about 10 million jobs. If there was a net increase of 215,000, it means that approximately 1.05 million jobs were created and 833,000 destroyed for the net increase of 215,000 in March. Even during the Great Recession, 10 million jobs were created annually but unfortunately 16 million jobs were destroyed. In the U.S., job creation peaked out at 16 million in 2000 and hit 14 million in 2006, so the economy has not recovered in terms of job creation. Fortunately job destruction of 10 million is a three-decade low.

Since the labor market hit bottom in February 2010, a net of 14.4 million jobs have been created over the 73 months, a record for the longest period of sustainable job growth. The unemployment rate rose to 5.0% in March from 4.9% in February. As perverse as it may sound, the rise in the unemployment rate was considered good news because the civilian labor force participation rate increased to 63% from a 39-year low of 62.4% in September, meaning more people are entering the work force. The labor participation rate of workers ages 25-54 was 81.2% in the first quarter, a three-year high, but still down from 83.3% in 2007. There still is some slack in the labor market.

The mood of many Americans doesn’t reflect the lowest unemployment rate in nearly a decade. While a net 14.4 million jobs have been created, only 5.6 million new jobs have been created since January 2008, which was the job peak before the Great Recession of 2008-2009. Job growth relative to population growth makes the 14.4 million look less impressive. The U.S. working-age population grew by 15.8 million since 2010 and 20 million since 2008. Job creation has not kept up with population growth. The Labor Department also reported that average hourly earnings increased 2.25% in March, relative to a year ago. This is below the last 6-month average of 2.5% but better than the 2.0% annual average over the prior four years.

Wages are subdued primarily because labor productivity remains close to zero. Productivity is weak because corporations have not invested in efficiency-enhancing equipment and may be substituting labor for capital because of low wages. Also the cause of the productivity problem may be structural; the service sector of the economy has become more dominant relative to the goods sector, and it is more difficult to increase productivity in the service sector. Also, less experienced millennials are replacing more experienced baby boomers in the work force.

Regardless of stimulative monetary and fiscal policies, the key to enhancing economic growth lies in the labor market. Economic output is a function of the number of workers times the productivity of each worker. The civilian labor participation rate needs to continue on its upward trajectory and labor productivity must improve. Increases in both are needed to get U.S. economic growth out of its lethargic 2.1% pace. Labor-force growth of 2% and productivity increases of 1% would produce a more desired 3% economic growth.