The Bureau of Labor Statistics (BLS) reported that payroll employment expanded by 295 thousand in February. Job gains in January were revised downward by 18 thousand and December was unchanged, bringing the average over the last three months to a healthy 288 thousand. The unemployment rate dropped to 5.5% from 5.7% in January, but the decline was dominated by labor force defections (178 thousand) rather than gains in employed persons (96 thousand).
Strong payroll gains and the decline in the unemployment rate make this appear to be a strong labor market report but that’s only half correct. The payroll gains are strong but the decline in the unemployment rate both this month and from its peak owe too much to labor force defections. So much so that the Federal Reserve was forced to abandon the unemployment rate as a target for monetary policy decisions and instead switch to a list of other labor market indicators, the two most infamous of which are the number of long-term unemployed (>=27 months) and part-time workers for economic reasons (hours cut or could only find part-time work). These measures are down from their recession peaks but remain elevated. Even after recent declines they are both still at levels that were peaks in earlier downturns. This shadow pool of labor will keep downward pressure on wage gains irrespective of continued declines in the unemployment rate.