The U.S. economy added a mere 98,000 jobs while the unemployment rate went down. How does that work?

The unemployment rate ticked down .2 percent to land at 4.5 percent in March, the lowest it’s been since the Great Recession — and about what economists call “full employment” in this country. But the U.S. economy added a mere 98,000 jobs in March — far fewer than the 180,000 experts had predicted.

These two baseline numbers from the monthly jobs report are the main indicators of the labor market’s health. So how can it be that one — the unemployment rate — is so good, while the other — the number of jobs added — is so disappointing?

It’s worth noting that the two numbers come from different surveys. The unemployment rate is derived from the household survey, which asks 60,000 households each month whether their members are unemployed, employed, working part-time, etc. The payroll number is determined by the so-called “establishment survey,” which asks businesses how many jobs they added that month.

The two surveys don’t always align, as former chair of President Obama’s Council of Economic Advisors Betsey Stevenson points out:

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While March’s unemployment rate was within the range of economists’ predictions, the number of jobs added missed economists’ predictions by more than 80,000. Prior to March, the U.S. economy had been adding an average of about 200,000 jobs a month for the past three months.

“Winter weather really wrecks havoc on the payroll data,” said Diane Swonk of DS Economics, noting winter storm Stella struck the week the survey was conducted. After an unseasonably warm February, March’s winter storms hurt hiring in industries like construction.

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Despite the disappointing payroll numbers this month, the average over the past three is still a solid 178,000 jobs per month, as economist Justin Wolfers notes.

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And as we often say here, never trust one month’s numbers. It’s better to look at longer-term trends.

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What does the jobs report tell us about underemployment?

“The other indicators of the health of the labor market, not just the unemployment rate, but the U6, were positive, and we also saw a decline of part-time workers,” economist Mohamed El-Erian said.

The Bureau of Labor Statistics’ U6 includes the underemployed (part-timers looking for full-time work and the “discouraged” — those who haven’t looked for work in the past month but have in the past year) in addition to those who are officially unemployed. U6 fell to 8.9 percent, due to the decrease in unemployment and those marginally attached to the labor force, economist Douglas Holtz-Eakin said.

“We’re still not back to where we want to be with the U6,” Swonk said. “The issue is how many of those workers can we bring back [to working full time]?” We are whittling away at the number of people working part-time for economic reasons, she said. Still, there are some 5.6 million people working part time who would like to be working full time.

Our own Solman Scale, which we also call U7, adds to U6 everyone who says they want a job, even if they haven’t looked for work in more than a year. U7 also fell, ticking down to 11.1 percent. To put this in perspective, when we began calculating U7 in August 2011, it was 18.3 percent.

Labor force participation

Both labor force participation and the employment-to-population rates are historically low, suggesting slack in the labor market: People who have left the labor force aren’t coming back, presumably because they don’t think there are jobs available to them or because the jobs pay so poorly.

“We’re dealing with the inequality trifecta, which is why this issue [of labor force participation] is so threatening to economic well-being. It’s not just of income and wealth, but increasingly it’s become an inequality of opportunity — and one of that is access to well-paying jobs,” El-Erian said.

“I think there’s even a certain [number] of long-term unemployed that are just dropping out of the labor force,” Bankrate.com’s Greg McBride said. One in four of those unemployed has been unemployed for 27 weeks or more; the long-term unemployed may be so discouraged that they aren’t even looking for work or are simply retiring early, he added.

Part of the decline in the labor force participation is due to baby boomers retiring. So “the fact that [the labor force participation has] climbed a little bit despite the baby boomers retiring, that’s a pretty good sign,” Harry Holzer, professor of public policy at Georgetown, said.

What’s going on with wages?

Wage growth ticked up in March, with average hourly earnings increasing by 5 cents, following a 7-cent increase in February. Over the year, wage growth has been 2.7 percent — still short of the growth desired by economists.

“Wages are moving up, but we’d like to see it more broad based,” Swonk said, noting that some of the gains were driven by minimum wage increases on the state and local level.

Wage growth ought to continue as we get closer to full employment.

“We should be seeing a hand off of from job growth to wage growth,” El-Erian said. “The one thing that has been lacking in this job recovery has been wage growth …  but as we take up slack in the labor force, we should expect wage growth to start going up at a higher rate.”

Holzer agrees.

“Employers will have to work harder to attract or attain workers,” he said, noting that workers are starting to see some real wage gains.

But still wage gains aren’t where Americans want them. Part of the issue, Holzer said, is “our productivity growth has been really lousy.”

This low productivity growth was the topic of a new International Monetary Fund report released this week. Productivity, in its simplest terms, is the amount of output per hour of work.  “Another decade of the similar trend that we’re observing at the moment, that sort of low productivity, would seriously undermine the rise in global living standards,” IMF chief Christine Lagarde said.

“For the last decade, it’s much harder to get wage growth without productivity growth,” Holzer said. “If you have sustained productivity growth and you maintain a fairly tight labor market, then you can get real wage growth that doesn’t feed into inflation.”

Let’s hope it happens soon.

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