South-Western College Publishing - Economics  
Job Growth Less Than Expected
Subject Job Growth
Topic Employment, Unemployment, and Inflation
Key Words

Job Growth, Economic Growth, and the Labor Force

News Story

The U.S. labor market expanded at a rather undistinguished pace during the first month of 2005. Following a year of robust economic growth, much more was expected of the labor market. Economists are baffled about why the strong economy did not encourage employers to hire more aggressively.

Job growth is often benchmarked against expanding population growth and the resulting new entrants into the labor force. These two measures effectively balanced each other out, which by itself translates into a stable unemployment rate. January figures indicated that the unemployment rate dropped to a three-year low of 5.2 percent in January from 5.4 percent the month before.

The drop in the unemployment rate arose mainly from the hundreds of thousands of discouraged workers who stopped looking for work and dropped out of the labor force entirely. As evidence for this discouraged worker phenomenon, we note that the labor force participation rate--the percentage of the working-age population actually in the labor force--settled at 65.8 percent, the lowest percentage since 1988.

In response to the report that the economy had only added 146,000 jobs in January, Morgan Stanley's chief fixed-income economist David Greenlaw said "This is a little bit below where we need to be. We need job growth closer to 200,000 to reduce the slack in the labor market and provide income growth to support consumer spending."

Given the strong economic growth and productivity declines that characterized the end of 2004, most economists expected businesses to hire more aggressively. As productivity falls and demand for goods increases, most employers are willing to put on more workers. Although this wave of expected hiring has not happened yet, it still might.

Ian Shepherdson, chief economist at High Frequency Economics in Valhalla, N.Y., blamed January's slow job growth on last fall's increased energy prices. Supply price shocks such as these can cause many firms to put hiring plans on hold. With oil prices now below their October high, Shepherdson believes that the job picture should turn around. "Leading indicators show demand for workers should pick up in March and April, Mr. Shepherdson said. "It's just a manner of time." Other economists do not share Shepardson's optimism. "We've been waiting for two years now for higher job growth," said John Silva, chief economist at the Wachovia Corporation in Charlotte, N.C. Mr. Silva believes that the economy is still recovering from the recession, and employers are more willing to invest in labor-saving technology than in hiring new workers. "This is as good as it gets - this is reality," said Mr. Silva.


Define discouraged workers. What data indicate a rise or fall in the discouraged worker phenomenon?

2. Why do economist "benchmark" employment growth against population growth?
3. Explain the concept of high labor productivity and how it can actually result in fewer new jobs.
Source Eduardo Porter, "146,000 Jobs Added in January, Fewer Than Expected," The New York Times Online, February 4, 2005.

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