Seeming to defy the law of gravity, the U.S. economy continued to churn out new jobs at a healthy pace in January even as the nation’s GDP growth rate stalled at 0.7% in late 2015.

The Labor Department’s Bureau of Labor Statistics (BLS) reported Friday that the economy created 151,000 new jobs last month while the unemployment rate dipped below 5% for the first time in more than eight years.  

Human Resources Legislation

INTELLIGENCE FOR HCM PROFESSIONALS

Stay Informed About Changing Compliance Regulations & Workforce Trends
Read the HR Legislation Blog to stay on top of complex HR & Payroll policy issues

Jobs Report: What Happened to Newton’s Law?

Fri Feb 5, 2016

Seeming to defy the law of gravity, the U.S. economy continued to churn out new jobs at a healthy pace in January even as the nation’s GDP growth rate stalled at 0.7% in late 2015.

The Labor Department’s Bureau of Labor Statistics (BLS) reported Friday that the economy created 151,000 new jobs last month while the unemployment rate dipped below 5% for the first time in more than eight years.

BLS said that the U.S. economic engine produced 295,000 new jobs in October, 280,000 in November and 262,000 in December, for a fourth quarter surge of 837,000 new jobs, the best of 2015, despite anemic economic growth.

How to explain this disconnect between a robust job market and a softening economy? The answer to the riddle may be found in productivity—the nation’s output of goods and services per hour. Productivity measures an economy’s efficiency; its output per unit of input of production factors like labor, factories, machinery and land.

However it’s defined, U.S. productivity growth has slowed sharply in recent years. BLS reported this week that nonfarm business sector labor productivity actually decreased at an annual rate of 3% during the fourth quarter of 2015. The agency explained that the nation’s output barely grew while hours worked increased by 3.3%. Unit labor costs, thought by many economists to be a precursor of inflation, accelerated 4.5 %.

Of great concern is the nation’s longer term productivity trend. BLS estimates that U.S. labor productivity in the nonfarm business sector grew by only 0.2% in 2011, 0.9% in 2012, 0% in 2013, 0.7% in 2014 and 0.6% in 2015.

In other words, because of declining productivity, the nation’s factories and offices need more workers to produce a given amount of output. On a macroeconomic level, slowing output (0.7% fourth quarter GDP growth) combined with sharply declining productivity (minus-3% fourth quarter productivity) means managers require more workers to produce goods and services.

In the short run this economic paradox is good news for jobs. An unemployment rate of 4.9% is unambiguously “full employment.” But in the log run a nation’s standard of living and competitiveness are determined mainly by productivity growth. Unless the U.S. can solve what is clearly a serious productivity problem, either inflation will accelerate or unemployment will rise. Newton’s Law of Gravity has not been repealed.