Momentum appears to have ground to a halt in U.S. labor markets as a payroll tax hike and widespread government spending cutbacks have taken their toll on hiring.
Predictions for the April jobs report out Friday reveal a pessimistic forecast of 145,000 jobs added last month. That’s up from 88,000 in March but not nearly enough to make a dent in the stubbornly high unemployment rate. Economists predict the rate will remain at 7.6%.
Analysts have blamed a 2% increase in the payroll tax in January, which will slash the average American paycheck by about $800 this year, as well as the across-the-board cuts in government spending known as sequestration, for scaling back consumer demand and consequently the need for hiring.
Much of U.S. monetary policy has been tied to labor markets. The Federal Reserve has said it won’t consider raising historically low interest rates or scaling back on its massive bond purchases until the unemployment rate drops to 6.5%.
“Because of government spending cuts and higher tax rates, the Fed has a higher hurdle to clear in lowering unemployment and promoting economic growth,” said Paul Edelstein, an analyst at IHS Global Insight.
Both low interest rates and the bond purchase programs, known as quantitative easing, are intended to spur economic activity by promoting lending, especially via low mortgage rates.
On Wednesday, citing high unemployment and fiscal policy out of Washington, D.C., that is “restraining economic growth,” the Fed said it was willing to expand those programs if the economy doesn’t show more strength in the coming months.
Those policies, until recently, had elicited fears of runaway inflation. Low interest rates which make it easier to borrow can push prices higher. But with job creation faltering, and wages and benefits practically stagnant, demand for goods has slowed and inflation has in fact been falling.
The Fed believes an inflation rate of 2% means wages and demand for goods are rising at a comfortable rate. If that rate is falling too quickly, as some believe is happening right now, it means wages and demand are weak, and that’s bad for economic growth.
The labor markets got some unexpected good news on Thursday when a government report revealed that the number of Americans filing claims for jobless benefits had fallen to its lowest level since just before the start of the financial crisis of 2008-2009.
Analysts said the data mean employers aren’t laying off as many workers as in recent years, a positive sign for workers.
One piece of data that will be closely watched Friday is the number of Americans who have dropped out of the workforce in April after giving up looking for work. That number has contributed significantly to the slow reduction in the unemployment rate despite lackluster job gains in recent months.
When people stop looking for work altogether the U.S. government no longer counts them as members of the workforce and they aren’t included in surveys that measure the unemployment rate. That often allows the unemployment rate to fall even though very few jobs were created in the prior month.
Indeed, in the wake of a tough recession like the one from which the U.S. just emerged jobs are often created at a high rate, drawing millions back into the workforce. That can push the unemployment rate higher for awhile before it starts to fall.
That hasn’t been the case during this recovery. In March the U.S. labor force shrank by nearly 500,000 people.
Another important contributor to the shrinking workforce, according to a recent Wall Street Journal report, is older Americans -- members of the Baby Boomer generation -- retiring in massive numbers.
The percentage of Americans either working or looking for work in March fell to its lowest point since 1979. The worker participation rate is now at 63.6%, down from 66% when the recession began four years ago. That, according to the WSJ, represents close to seven million workers who are no longer part of the workforce.