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Markets and Economy

The Labor Market’s New Normal

After nearly a decade of above-trend job creation, November brought a hiring slowdown. Given the low levels of unemployment and the lack of obvious slack in the labor market, slowing job growth should be seen as a healthy sign that the economy is finding a sustainable rhythm.
Jim Glassman, Head Economist, Commercial Banking
December 12, 2018

The US economy has added an average of 200,000 new jobs every month since 2010—but in November, it only added 155,000. This hiring slowdown was widely interpreted as a setback for the expansion, but it may simply mark a return to full employment.

Years of above-trend job growth have brought headline unemployment to a near-historic low, and the labor market is finally tightening. The nation’s working-age population is expanding by only 75,000 potential new workers every month. As the peak of the business cycle arrives, job growth will inevitably level off at a sustainable equilibrium.

Last of the Slack

Job creation has been absorbing the labor market’s excess slack for so long that its pace has started to seem normal. The 2008 recession left a tremendous number of workers unemployed; millions more delayed joining the workforce at all, opting to pursue education while waiting for their job prospects to improve. The hidden slack created by these discouraged workforce dropouts allowed the economy to continue adding jobs at an accelerated pace long after the headline unemployment rate dipped into full employment territory.

But the creation of 200,000 new jobs every month is not sustainable, given the number of potential workforce participants. The US population as a whole is still growing, but the expansion of the workforce has slowed dramatically as the baby-boom generation enters retirement. Prior to the recession, the working-age population was growing in line with the broader population, adding approximately 200,000 new job seekers a month. Over the past decade, however, the growth rate of the nation’s working-age population has declined by more than half.

The economy has sustained eight consecutive years of above-trend job growth without overheating. But this pace of job creation can’t go on forever—the labor market is running out of slack, and businesses are struggling to fill openings.

What Remains Hidden?

The true amount of slack remaining in the labor market is hard to pinpoint. The workforce participation rate among prime working-age Americans—those ages 25 to 54—has yet to recover its pre-recession peak; approximately 1 million idle workers could theoretically return to the labor market. In the late 1990s, almost 84 percent of prime working-age Americans were employed or looking for work. That figure now stands at 82.2 percent. Payrolls could continue expanding at the current pace for another full year before the workforce participation rate regains its pre-recession heights.

But because of demographic shifts, a full recovery in the workforce participation rate is unlikely. The outsized baby-boom generation is skewing the workforce’s age distribution—a relatively larger number of prime working-age adults have entered their 50s, reaching the age at which people have always begun exiting the workforce. Many of the nation’s missing workers have taken an early retirement and are unlikely to reenter the job market, regardless of the demand for labor.

Finding a New Normal

It’s too early to know whether November’s slowdown will endure. Job growth can be volatile; in recent years, hiring has often rebounded after weak months. Natural disasters may have contributed to the pause last month. Wildfires in California, early snow in the Midwest, and hurricanes in the Carolinas undoubtedly caused some businesses to delay adding new workers.

But the move toward a new equilibrium is inevitable. Without stronger immigration flows, job growth will have to slow to a more sustainable pace. If the rate of job creation comes into alignment with underlying population growth, it won’t be a sign of weakness: As full employment arrives, a slowdown in job creation will be necessary to prevent overheating and prolong the expansion. Through the remainder of the business cycle, economic growth will be driven by the worker productivity gains resulting from investments in productivity-enhancing technologies.

View our economic commentary disclaimer.



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