Jobs Report: Strong report shows we’re closing in on full employment but not quite there yet.

March 10th, 2017 at 9:42 am

In the latest edition of a long series of solid job reports, payrolls posted a strong 235,000 job gain last month, as the unemployment rate ticked down slightly to 4.7 percent and wages accelerated a bit.

Federal Reserve officials, many of whom had already been talking about getting back to their “normalization” campaign–raising the benchmark interest rate they control back up to more normal levels–sooner than later, will find very little in today’s report to wave them off a rate hike at their next meeting later this month.

The jobs day smoother, which averages out monthly noise over 3-, 6-, and 12-month periods, shows payroll growth at around 200,000 jobs per month at each one of these averages. Given the size and growth of the labor force, this healthy pace of employment growth is strong enough to continue putting downward pressure on the jobless rate and upward pressure on wage growth.

Source: BLS

Speaking of wages, the pace of growth of workers’ paychecks is sending a signal that the tightening job market is providing workers with a bit more bargaining clout. In tight labor markets, which have been the exception in the US job market in recent decades, employers typically must bid compensation up to get and keep the workers they need.

We’ve already seen some of this dynamic in recent job reports, as the figure below reveals. From about 2010 to 2015, average hourly wages grew at about 2 percent, year-over-year. But around mid-2015, as unemployment hit 5 percent, heading for rates with a ‘4’ handle, wage growth accelerated. It held at around 2.5 percent for a few months, but as the figure shows–note the smooth trend line–has accelerated further in recent months, increasing 2.8 percent in February.

Source: BLS

The question for the Federal Reserve, however, is not just “are wages accelerating?” Their dual mandate is full employment at stable prices, not stable wages. Moreover, wage gains for middle- and low-wage workers have been long awaited in this recovery, so the decision to tap the brakes on growth by raising the interest rate–which could push back on this favorable, accelerating trend–cannot be taken lightly. The questions much be a) how much slack is left in the job market? and b) most importantly, is wage growth fueling faster price growth?

Re ‘a’, (are we at full employment?): Not quite. The underemployment rate, a broader measure of slack, fell from 9.4 percent in January to 9.2 percent last month, but it is still elevated due to 5.7 million involuntary part-timers, though that number is down 300,000 from a year ago. Still, at full employment, I’d like to see an underemployment rate of around 8.5 percent.

The other indicator that still has some room to run is the employment rate of prime-age workers. At 78.3 percent, it’s still below its pre-recession peak of 80.3 percent (see figure). However, at its low point, this rate was at 74.8 percent, meaning these workers have clawed back 3.5 percentage points, or about 2/3’s of the decline. That decline was stronger for men–their employment rate fell 7.6 points from its peak, but they’ve made back about 5 points, also about 2/3’s. Women were down 4.1 points and have made back about 3 points.

Source: BLS

These gains seriously challenge a common narrative that goes something like this: some number of prime-age workers are “ungettable,” meaning they can’t be pulled back into the labor market because of “supply-side” problems–they’re disabled, they’re addicted to drugs, they’re too busy playing video games. I do not at all dismiss these problems and that supply-side number isn’t zero, for sure. But as labor demand has strengthened, the progress we’ve seen in prime-age employment is telling us something important about these men and women that we shouldn’t ignore. Most of them will work if they can find gainful employment.

On wages and prices, the figure below shows:
–the unemployment rate is right about at what the Fed thinks is full employment;
–as shown above, wage growth is picking up a bit;
–the Fed’s inflation gauge, core PCE, is growing a touch faster but remains below the Fed’s target inflation rate of 2 percent, a miss that’s been persistent in recent years.

Sources: BLS, BEA, Federal Reserve

Summarizing, we’re edging closer to full employment but the risks remain at least somewhat asymmetric for the Fed: the risk of slowing demand too soon is probably still a bit greater than the risk of un-anchored price inflation. But I admit it’s a closer call than in past months and can see their rationale for a quarter-point hike.

A few other notable indicators:

–The 58,000 jobs gained in construction were partly due to unseasonably warm weather in February. The non-seasonally-adjusted gain of 61,000 was the largest on record since 1968.

–The 28,000 gain in manufacturing, its best showing since January 2016, was also very welcomed, especially given the increased strength of the dollar, which makes our manufacturing exports less price-competitive in international markets.

All told, the US job market continues to post solid gains, and the tighter job market is delivering wage gains to working families, and not just at the top, but across the wage scale. The data may well push the Fed to raise rates a bit, but if so, their best move would be one-and-done, at least for awhile, while they make sure their actions do not interrupt some of these favorable, ongoing trends.

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10 comments in reply to "Jobs Report: Strong report shows we’re closing in on full employment but not quite there yet."

  1. Kevin Rica says:

    Jared,

    How do you define “full employment” (without any of the circular, Panglossian, post facto justification used by politicians to say that they are actually doing a good job)?


    • Kevin Rica says:

      Jqred,

      This is more that a rhetorical question as an article in today’s NYTimes makes clear, https://www.nytimes.com/2017/03/12/business/trump-fed-interest-rate.html?_r=1.

      The Fed believes that we are at full employment when they don’t want to create any more jobs (maybe because wages might go up). That doesn’t mean that everyone who is willing to put in an honest day’s work can find a job.

      The Fed’s believe is that the economy can’t grow fast enough to actually give everybody a job because there aren’t enough people looking for work. As they say in Fedspeak: Good enough for government work!


  2. Smith says:

    Returning to Factville, using this blogs own numbers we are not near full employment.
    The gap in U6 of .7 percent means .007 * 150 million workforce equals 1.1 million (that’s from the above figure of 9.2 minus the 8.5 goal leaving the .7)
    The gap in workforce participation is 2 percent or .02 * 125 million equals 2.5 million, but lets conservatively cut in half saying half are disabled, on drugs or playing video games. So that’s 1.1 million. Then take the 200,000 per month new job figure and remove the 100,000 needed per natural growth rate of population, and divided the 1.1 plus 1.1 gap, that is 2.2 million divided by 100,000/per month equals 22 months.
    The wage growth is nominal wage growth. Real growth was 0, zero, nada, bubkis for 2011, 2012, 2013, and 2% in 2014 and 2015 due to low inflation. It would be good to see 3% nominal growth sustained and distributed to lower income groups which could only happen if inflation was above 2%. What happens to wage growth when you smooth it or average over a few years and show real growth not nominal, and show for the bottom half of income groups?
    http://jaredbernsteinblog.com/a-quick-look-at-recent-wage-growth/

    Minimally, we’re two years away from full employment if nothing disturbs economic expansion and current trends. Why is this economist not heeding is own data? Two years apart from Factville.


    • AngloSaxon says:

      This was true in the 90’s as well during the oil price slump in 1998. Nominal wages are effected by oil prices, period. If it shot back up to 100$, wages would spike along with CPI at this stage. So what is better, CPI at 3% and 3.5% nominal wages or 2% CPI and 3% nominal wages?

      I suspect the U-6 will be nearing Bush era lows by June 2018, the party is over. Oil prices are the key factor now just like they always are.


      • Smith says:

        No. When oil prices rise, inflation rises of course. The stupid Fed responds by raising interest rates because Saint Volcker was hailed as a hero for causing the biggest recession since the Great Depression up until our Great Recession of 2009. People have less money because of oil prices and ripple effects in the economy, plus interest rates rise hurting autos and construction. It’s an idiotic system which both conservatives and liberals, Democrats and Republicans, blue and red states follow. Accelerating inflation comes from businesses (oligopolies and monopolies, but small firms following suit) fighting against rising costs, and lower sales, by raising prices. Wages do not keep up, as you yourself point out the gap between nominal increase and inflation tends to narrow.

        What I advocated for was allowing inflation to rise from wage increases, not oil prices. There is no such thing as full employment and 2% inflation since we only had average yearly inflation of 2% or less and 5% or less unemployment in a non recessionary year, four times. 1998, 1965, 1955, 1954.

        Liberal Democrats who speculate that 2% may be a bit low are not living in Factville. 2% is a ludicrously low figure.


        • AngloSaxon says:

          oil prices fuel faster inflation and wage growth when the economy “normalizes”. We see this both in ups and downs of 97-99 and 06-08. When oil prices shot up from 2010-14, you see the damage it did to real wages. Yet, wages could not rise enough to offset it due to the weak labor market.

          That is why keeping real wages growing is important.


          • Smith says:

            Oil shocks do not by themselves produce the kind of inflation economists fear (accelerating and or self perpetuating). This is common sense though economists on the left and right over complicate matters because everyone prospers (except working people, the bottom 90%) from the current system.
            Blaming oil prices for inflation means you don’t understand what comprises problem inflation (again, self perpetuating and or accelerating).
            Let’s say $50/barrel doubles to $100/barrel, and the amount of money spend on oil based on 7 billion barrels consumed per year jumps $350 billion. In a nearly $20 trillion economy, that’s a 1.75 percent jump in inflation. That’s assuming no one cuts back their use of oil despite doubling of cost. Add that to a normal 3 percent inflation rate, and you’re left with a jump to maybe 5 percent. Big deal. Next year it should go back to 3 percent, or much lower if the Fed destroys the economy by raising interest rates.
            The 5 percent is sustained only when sneaky monopolistic businesses raise prices beyond increased costs, or (if viable labor pressure existed) the businesses refuse to share the cost of inflation with labor (meaning they pass the 1.75 percent to the consumer, and then add any part of 1.75 the conceded to labor) thus accelerating the inflation rate.
            Again, the inflation problem comes not from fluctuations in commodities, oil shocks, or wage demands. It comes from businesses behaving badly. Higher prices are caused businesses raising prices higher than they should. Why would they do that? Because they can. They set prices at will. If the price is too high, what are you going to do? Open your own auto factory? Walmart chain? Amazon retailer? Bank or credit card? Who owns the means of production, also sets prices.


  3. Smith says:

    Death by Unemployment
    http://thelancet.com/action/showFullTextImages?pii=S2215-0366%2814%2900118-7
    “In all world regions, the relative risk of suicide associated with unemployment was elevated by about 20–30% during the study period.”
    There’s also data about movement in unemployment levels causing death. Plus this:
    https://www.nytimes.com/2016/04/22/health/us-suicide-rate-surges-to-a-30-year-high.html
    It’s the tenth leading cause of death at 40,000/year.
    But, if you decrease unemployment by 2% (2 million or so) using U6 and workforce participation, thus removing the 25% increased risk, it’s less than 100 of the 40,000 are saved?
    That’s weird, you get a 20 to 30% boost in risk, but under full employment, you’d save only 100 people or less. (because 95% of the labor force have jobs, and 4% unemployment is full employment)
    However the headlines show 45,000 dying to work, so maybe there is a bigger impact
    http://www.dailymail.co.uk/health/article-2947700/Unemployment-linked-45-000-suicides-year-study-finds.html
    https://www.theguardian.com/society/2015/feb/11/unemployment-causes-45000-suicides-a-year-worldwide-finds-study


  4. Ken says:

    “some number of prime-age workers are “ungettable,” meaning they can’t be pulled back into the labor market because of “supply-side” problems–they’re disabled, they’re addicted to drugs, they’re too busy playing video games.”

    Or, they net more money working off-the-books than they would at $7.25 or a little more in a “real” job.


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