By Mark Lieberman
Managing Director and Senior Ecomomist
The nation’s labor force contracted sharply in December, bringing the unemployment rate to 6.7 percent, its lowest since October 2008, the month before President Obama’s election, the Bureau of Labor Statistics reported Friday.
Dampening the good news about the drop in the unemployment rate, BLS also reported the nation added 74,000 new jobs, the weakest job growth since January 2011. Three of every four of the new jobs came in the two lowest paying industry sectors – retail which added 55,300 jobs and leisure and hospitality which accounted for 9,000 new jobs – shifting the economic story from a tale of weak job growth to still weaker income growth.
Indeed with a dip in average weekly hours to 34.4 from 34.5, average weekly earnings dropped to $831.45 in December from $833.18. Average weekly earnings are up just 1.4 percent in the last year, according to the BLS data.
The BLS revised upward the reported job gains for November, to 241,000 from the originally reported 203,000. Job growth in October was 200,000, unchanged from the last report.
The BLS report confounded economists who had expected close to 200,000 new jobs in December with the unemployment rate holding at 7.0 percent.
The drop in the unemployment rate came as a result not of new jobs, but a sharp increase in the number of persons not in the labor force – 525,000 – to 91,808,000, an increase of 2,969,000 in the last year. In 2012, the number of persons not in the labor force increased 2,199,000. The labor force itself shrank 347,000 as employment increased 143,000 and unemployment came down 490,000.
To be considered unemployed by the BLS, an individual must be out of work, available for work and looking for work.
The labor force participation rate, which measure the share of the over-16 population either employed or unemployed, dipped to 62.8 percent in December – matching October for the lowest level since February 1978.
The employment-population ratio, measuring the share of the over-16 population which is employed, held at 58.6 percent in December, unchanged from November. When the unemployment rate was last as low as it was in December, the employment population ratio was 64.1 percent.
The lower unemployment rate moved closer the 6.5 percent threshold set by the Federal Reserve as one of two pre-conditions for increasing the federal funds rate – the interest rate banks pay to borrow from each other – from its current 0 to ¼ percent. But the Federal Open Market Committee could also look at how the lower unemployment was achieved. The FOMC last month announced it would cut back on its purchase of mortgage backed and treasury securities which was another part of its efforts to stimulate the economy by holding interest rates down.
Payroll job growth was held back by a drop in government jobs which fell 13,000 in December. Federal and state government jobs dropped 2,000 each in December while local government payrolls contracted by 9,000.
In addition to the new retail and leisure-hospitality jobs, BLS also reported the number of temporary jobs increased by 40,400, the largest month-month gain since February 2012. The increase in temp jobs reflected not only holiday season hiring but the advent of the Affordable Care Act since temporary workers would not be considered employees for mandated health insurance coverage.
While the number of temporary jobs improved, other “professional and business service” jobs dropped with BLS reporting the number of accounting jobs fell by almost 25,000 and the number of legal jobs dropped almost 1,000.
At the same time the number of construction jobs dropped 16,000 though the number of construction jobs related to residential construction increased by about 6,000.
The three-tenths of a point drop in the unemployment rate was the sharpest since September 2012, when the unemployment rate fell to 7.8 percent. The report then drew criticism because of the timing of the release, just weeks before the November presidential election.
Unemployment in December fell for the sixth straight month, dropping 490,000 to 10,351,000. The month-month decline was the largest since December 2010 when unemployment fell 740,000 in one month.
The number of long-term unemployed – those out of work for 27 weeks or longer – fell for the fourth straight month, dropping 166,00o to 3,878,000. Unemployment benefits for long term unemployed stopped at the end of the year when the Emergency Unemployment Compensation (EUC) program was not funded in a budget compromise passed by Congress.
The increase in low wage jobs contributed to sharp declines in the unemployment rate for teens and for those without high school diplomas. The unemployment rate for teens fell 0.6 percent to 20.2 percent in December and for those without high school diplomas fell 0.8 percent to 9.8 percent, under 10 percent for the first time since September 2008.
The unemployment rate for college graduates dipped 0.1 percent in December to 3.3 percent, the lowest since November 2008 when it was 3.2 percent.
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