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Continued improvement in the labor market

According to the Establishment Survey, the private sector has been adding jobs at a 2.1% annualized pace over the past six months. That's about what we saw in the 2004-2007 period, but it's nothing to get excited about. However, according to the Household Survey, the pace of growth has been a very impressive 4%. I'm inclined to go with the Establishment Survey on this one, since it looks to me like the Household Survey is simply catching up to the Establishment Survey after growing more slowly over the past year or so. In any event, it remains the case that the economy is creating a decent number of jobs, and the outlook therefore continues to improve, even though the unemployment rate is still very high (8.3%).

One thing that stands out in today's report is the recent growth of the labor force (the number of people either working or looking for a job). As the first chart above shows, we've gone from a shrinking labor force to one that is growing at its long-term average (about 1% a year) in the past six months or so. The upturn is just barely noticeable in the second chart, but it's there. The flat-line behavior of the labor force over the past 3 years has been the most unusual characteristic of this recovery. Because they were either discouraged about getting a job, and/or satisfied with collecting generously-extended unemployment benefits and food stamps, today there are some 5 million people sitting on the sidelines that would normally either be looking for a job. If they all decided to get back into the labor force tomorrow, the unemployment rate would skyrocket. If they slowly decide to come back, then that will have the effect of keeping the unemployment rate unusually high for quite some time, and that seems to be what will most likely happen.

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