Funky job reports are not unusual, and the employment data for April certainly fits the bill. How else to explain the biggest gain in hiring in more than two years – at the same time the labor force shrank by the second largest amount in 32 years.
Let’s review. The U.S. added 288,000 jobs in April, the biggest spike since January 2012. The increase in employment is measured by the so-called establishment survey that quizzes private firms, government work sites and nonprofit institutions.
Yet the size of the labor force sank by 806,000. That’s the biggest drop since a 848,000 plunge in October and you have to go all the way back to 1981 to find another 800,000-plus decline. Labor-force changes are measured by the “household” survey that interviews Americans directly.
Typically a shrinkage in the labor force occurs when people become so discouraged about finding a job that they give up looking for work. Yet the April surge in hiring would suggest that more jobs – not fewer – are available.
“You have drastically different messages offered by the establishment and household surveys,” said Stephen Stanley, chief economist of Pierpont Securities. He called the report “puzzling.”
What’s also odd about the decline in the labor force is how it happened. The number of so-called re-entrants – unemployed workers who have started looking for jobs again – fell by a whopping 417,000. That’s the biggest drop since the government began keeping records in 1967.
And new entrants into the labor force, such as graduates or immigrants, fell by 126,000. That’s the biggest decline in more than five years.
Put another way, two-thirds of the drop in the labor force stemmed from people choosing not to enter in the first place. Normally a decline takes place when workers exit the labor force.
In all likelihood, the plunge in the labor force in April reflects seasonal-adjustment quirks that will soon fade. The number should generally be ignored, in other words. “This data tends to be very volatile from one month to the next,” Stanley noted.
Another possibility is that the decline reflects a reversion to a long-time trend in which the labor-force participation rate continues to fall. The rate had declined steadily since the end of the recession in mid-2009 before surprisingly turning higher in early 2014.
The big drop in April – to 62.8% from 63.2% – drove the participation rate back down to a post-recession bottom and matched a 35-year low. The rate tells us the percentage of Americans 16 or older who have a job or want one.
“We saw a rise in the participation rate over the past few months that didn’t make sense,” said Bricklin Dwyer, a senior economist at BNP Paribas. “So now we’ve gone back to what the trend was.”