Job Growth in September Stalls, Marking the Worst Month of Growth in 2021

Key Takeaways:

• The economy added just 194,000 jobs in September—below the expectation for a gain of roughly 500,000—marking the smallest monthly job gain of the year so far.
• A key gauge of the recovery, the labor force participation rate, declined to 61.6 percent in September, as 183,000 Americans gave up looking for work entirely and exited the labor force.
• Total employment remains 8.5 million jobs below the pre-pandemic employment trend as the recovery in the labor market stalls.
• At this pace of job growth, it would take over two more years to return to the pre-pandemic level of employment, and America would remain permanently below its pre-pandemic jobs trajectory

Today, the Bureau of Labor Statistics (BLS) released the Employment Situation Report for September, finding that last month’s number of job gains was the lowest of 2021 so far and—for the second month in a row—came in far below economists’ expectations. The economy added 194,000 jobs in September, below the expectation for roughly half a million. This follows August’s revised gains of 366,000, which fell far short of the expected 720,000. Although the unemployment rate fell to 4.8 percent in September, much of this decline was likely driven by 183,000 individuals giving up looking for work and exiting the labor force entirely. The dismal report confirms that the economy is in an increasingly fragile position, and the continued recovery is failing to deliver for the 8.5 million Americans who remain out of work relative to the pre-pandemic employment trend.

Of greatest concern in today’s report is the increasing level of disengagement from economic activity among many Americans. The overall labor force participation rate (LFPR)—the total number of individuals working or actively searching for work as a share of the population—ticked down to 61.6 percent. As shown in the figure below, the LFPR has remained stagnant for well over a year and, as of September, remains a staggering 1.8 percentage points (p.p.) below the pre-pandemic rate—putting the LFPR at its lowest rate since the 1970s, when women were just beginning to enter the labor force in increasing numbers. Beyond this headline rate, however, data reveals that the distribution of economic disengagement increasingly fell on blue-collar workers, women, and minorities. The LFPR for men remained the same in September, while the LFPR for women decreased by 0.3 p.p. The participation rate for those with less than a high school diploma decreased by 0.5 p.p. relative to the decrease in the participation rate for those with a bachelor’s degree or higher of just 0.2 p.p. The LFPR for Black Americans decreased by 0.3 p.p. relative to the overall rate decline of 0.1 p.p.

The overall gain in nonfarm payroll employment of 194,000 is the lowest monthly gain of the year. While data on total unfilled job openings lags the monthly employment report, as of July, a record-high 10.9 million unfilled job openings were reported. As the figure below shows, this exceeds the total number of unemployed persons—again as of July—by 2.2 million, or 25 percent. This trend of demand for labor far exceeding the supply of willing, available, and qualified workers coincides with record-high income dependence on the federal government. A deluge of government transfer expansions—from food stamps to monthly Child Tax Credit (CTC) payments—combined with the roll back of work requirements for these benefits will continue to weigh on the labor market’s recovery. President Biden’s proposed budget seeks to solidify and make permanent much of these transfers and work requirement waivers. One estimate found that these work disincentives could reduce employment by as much as 7 million job.

While job growth in most industries remained tepid, though positive, in September, employment declines in the healthcare, educational services, and state and local government education sectors were notable. These declines coincided with the implementation of some Covid-19 vaccination mandates for employees in these sectors. Healthcare employment declined by 17,500, private educational services employment declined by 18,900, and state and local government education employment declined by 160,800. While it is unclear to what degree coinciding—as well as impending—Covid-19 vaccination mandates impacted these declines, as further and more widespread mandates are implemented it will be important to continue to monitor the potential effects they have on employment in healthcare, educational services, and other industries. The financial strain of these mandates on private business may be far higher than many anticipate.

The economy, and the labor market in particular, remain in a fragile state and are vulnerable to further implicit or explicit taxes on employment. Relative to the pre-pandemic employment trend, the level of employment as of September falls short by 8.5 million. The last two months of exceedingly weak employment growth represent nothing short of a recovery stall. If job growth continues at the current anemic pace, the U.S. economy will not return to its pre-pandemic level of employment until over two years from now, and even then, that would put America on a permanently lower trajectory than was the case before the pandemic. This stall comes as the average Covid-19 daily case count is 62 percent below the daily case count at the beginning of 2021 and 41 percent below the peak of the recent wave at the end of August. As shown in the figure below, in all recessions prior to the Great Recession of 2008-09, it took on average 21 months for employment to return to the pre-recession level. The Great Recession of 2008-09 marked the weakest recovery in modern U.S. history, with employment not returning to its pre-recession level for 77 months. The current path of employment recovery from the pandemic appears to be at an inflection point, with the recent stall risking a prolonged and weak recovery similar to the 2008-09 Great Recession recovery, rather than the experience of prior recoveries. The fact that 34.5 percent of unemployed workers have been jobless for six months or longer—an improvement from 37.4 percent in August but still higher than at any point in post-WWII, pre-pandemic history except during the aforementioned slow recovery from the Great Recession—is a worrisome sign for the long-run prospects of the labor market, as workers who are unemployed longer are more likely to leave the labor force permanently.

The Employment Situation Report for September is the latest economic signal to flash red and indicate the possibility of stagnating growth. This comes also as inflation concerns continue to persist, leading to the dangerous possibility of coincident stagnation and inflation, or stagflation. As Congress debates elements of President Biden and Senator Sanders’s proposed big-government socialism budget, concern for the recent economic warning signals is noticeably absent. Indeed, expectations on the implementation of these policies may be affecting and contributing to the weakening economic outlook. Policymakers should remain vigilant and take into account the fragility of the U.S. economic position while debating proposed policies.

Cale Clingenpeel serves as Chief Economist for the America First Policy Institute (AFPI).