Employment: steady gains continue

If there's anything remarkable about the private sector jobs market (the only one that really counts, since the public sector is far less efficient), it is the under-appreciated fact that it has been growing at a relatively steady pace of just over 2% per year for the past four years. That's as fast as it grew in the prior business expansion (2002-2007), but that pace of growth lasted only three years. So in at least one important aspect, this recovery has actually been better than the last. The big difference between the two, of course, is the labor force participation rate: there are upwards of 10 million people who have dropped out of the workforce. The economy has been adding jobs at a decent rate, but from a lower base.

The current recovery boasts four years of jobs growth exceeding 2%. In the prior one, there were only three years.

The labor force grew at just over 1% for many decades until growth virtually ceased starting in 2009. There's been only a very slight uptick in growth in recent years. 

Despite four years of over 2% growth in private sector jobs, total employment today is only marginally higher today than it was at the peak of the last expansion. If this had been a normal recovery there would be at least 10 million more people working. That adds up to an annual income shortfall of about $2 trillion.

The big question is whether this picture will change if the Fed continues to keep short-term interest rates extremely low. I for one fail to see how low interest rates will cause the economy to add jobs at a faster rate than it has managed for the past decade, or how low interest rates will encourage 10 million people to start looking for jobs again.

I think the underlying problem is not interest rates or monetary policy. We've created numerous barriers to re-entry to the labor force: transfer payments are at all-time highs relative to disposable income; and marginal tax rates for those receiving government assistance are extremely high (for many, the decision to work would mean the loss of benefits and less disposable income). And there are barriers to jobs creation as well: marginal tax rates on capital are higher than they have been for decades; and regulatory burdens have never been so heavy. In short, the economy still faces a nmber of significant headwinds which will not diminish just because interest rates are low.

So the fix needs to come from Congress, not from the Federal Reserve. I'm optimistic that Congress will manage to convince Obama to accept at least a few pro-growth changes in coming years.