– by a New Deal Democrat
It’s Labor Day, so let’s look at a few indicators of how labor is doing.
As an aside, I am sometimes asked why I write about expansions and recessions. An important reason is, almost by definition during a recession, jobs and incomes fall. During expansions, they expand. So predicting whether the coming period will involve better or worse employment and income conditions for average workers is a social good in my book.
There was an apparent anomaly in last Friday’s jobs report in that the unemployment rate rose (bad) but the labor force participation rate increased (good). How is this possible and what does it mean?
Not everyone participates in the workforce. People are pensioners, or housewives, or full-time students, or disabled. Or discouraged, thinking they can’t find work. All other adults—those in the labor force—either have a job (employed) or they don’t (unemployed). The LFPR measures the combined sum of the two, while the unemployment rate measures only the latter.
There is a problem in working with the long-term LFPR because cyclical trends are swamped by the secular tsunami of women entering the labor force between the 1960s and 1990s, along with the very slow decline in male participation that has continued since 1950. So I’m only measuring early to mid 90’s.
Since 1994, the LFPR has been a “long-lagging” indicator emerging from recessions. It only reaches significant bottoms *after* peaks in the unemployment rate, sometimes for years. Generally speaking, people don’t bother entering the workforce unless they think there is a likely prospect of finding a job. There is no magic number, but over the past 30 years it has been roughly once the U6 underemployment rate falls below 10%. In the graph below, I subtract the U6 speed from 10% so that any number below 10% is shown as positive and any number above it is shown as negative:
The LFPR bottomed out in 1994, 2005, and 2015, *long* after the end of the last recession, and also several *years* after the underemployment rate was at its worst. At peaks, the behavior is different, as the LFPR peaks coincide with or even slightly *before* the underemployment rate. This is especially true if we use a 3-month average of LFRP rather than noisy monthly data.
Here is the same chart for the last 2 years:
This report from last Friday looks like an anomaly because the underemployment rate worsened but the LFPR increased. But since the LFPR is noisy, if we look at the 3-month average, the peak of the LFPR is currently still from March to May. In other words, the pattern from the last 3 expansions could be repeated in this one, although the jury is still out.
Another way to look at the LFPR is to decompose it into the monthly change in employment relative to unemployment, which makes the graph below for the last 21 months (the #s would have been off the scale before):
A slowing trend in employment growth (in blue) is evident, as is a slowing – and perhaps a reversal – trend in unemployment decline. I suspect the big increase in employment in August will prove to be a positive departure, but we’ll have to wait a month or two to find out.
Another metric I wanted to touch on this Labor Day is “real aggregate wages” for nonsupervisory workers. This is the total income received by the working and middle class, after adjusting for inflation. This information is almost 60 years old, so I’m splitting it into 2 graphs; first, 1964-1993:
And here is 1994-2022:
This metric has a lot of signal and little noise. With the exception of the 2020 pandemic, it always slowed months before the start of the recession, and with one exception also declined for about 6 months or more before the start of the recession (in 1969 it peaked one month before the recession).
Here are the last 2 years:
We see a clear slowdown starting in September 2021 and an actual decline this spring before recovering in July.
The spring decline was mainly due to the spike in gas prices due to the invasion of Ukraine and the rebound in July due to the large drop in gas prices that month. *Nominally,* according to Friday’s report, overall wages rose 0.3%. As gas prices continued to fall in August, this will likely translate into another month of real gains in aggregate income, but we’ll have to wait for next week’s CPI report to be sure.
Ultimately, we could still see a new record in real total income, but at least the sharp slowdown trend is likely to remain intact. This streak continues to warn of a likely recession in the coming months.