The US job market continues to deliver solid job gains, as the nation’s payrolls rose 227,000 last month, the strongest month for payroll gains since last September. The unemployment rate ticked up slightly to 4.8 percent, due largely to an increase in labor force participation, a positive indicator of more workers drawn into the improving job market. Average wages were up 2.5 percent over the past year, a slight deceleration from recent months, but still beating recent inflation, meaning that, at least on average, real paychecks have been gaining some buying power.
This month’s smoother, which boosts the data’s signal-to-noise ratio by taking averages in monthly job changes over 3-, 6-, and 12-month windows, shows steady employment growth in the range of about 185,000-195,000 per month.
Construction employment was up 36,000 over the month. Residential building has boosted job growth in the sector, accounting for three-fourths of the 170,000 jobs gained in construction over the past year. Restaurants and bars added 30,000 jobs, building on a solid trend with jobs up 286,000 jobs over the past year and providing an indicator of healthy consumer spending. Health care employment, driven in no small part by health care reform and its sharp increase in insurance coverage of millions of Americans, was up 18,000 in January and 374,000 over the year.
While the job market continues to improve, there are still some concerning indicators. The underemployment rate (or U-6 in BLS terminology; see figure), which adds involuntary part-timers to the unemployment rate, along with smaller groups of people not looking for jobs because they couldn’t find work (“discouraged” workers), has been stuck around the mid-9’s. My analysis suggests that at full employment this measure should be around 8.5 percent (that’s U-6*). Also, while the tick up in the participation rate is welcomed, it remains well below its pre-recession peak, including for prime-age (25-54) workers, meaning this is not purely a benign story of retirees aging out of the workforce. At 78.2 percent, where it has been stuck since October, this prime-age employment rate is still two full percentage points below where it was before the Great Recession. A tighter labor market offering better jobs could likely pull some of these working-age folks into the workforce.
Focus on Wages
As the 2017 data flow gets underway, let’s review the current wage story. To keep things simple, we’ll start by checking in with nominal wages (wages before accounting for the impact of inflation). As the job market tightens up, we typically expect some pressure on wage growth, as employers have to boost pay a bit to get and keep the workers they need. Given that the US job market has been closing in on full employment (even with the caveats just noted), we’d certainly expect to see that dynamic in play, and in fact, we do.
The first figure below shows annual growth rates of average hourly wages of private sector workers over the past decade or so (which is as far back as this wage series goes). This short series, which includes a smooth trend, tells the wage dynamics story quite clearly. Nominal wage growth slowed significantly in the recession, was flat over the initially weak recovery, and starting around mid-2015, began to slowly accelerate. At the end of the figure, you see the 2.5 percent growth rate discussed above.
But do other wage series show similar patterns and do they do so over a longer time horizon? The figure below is instructive in this regard, as it uses a statistical technique (principal components analysis) to combine five different wage and compensation series going back to the early 1980s. The cyclical pattern of wage growth shows up in the figure, as does the recent acceleration. If seems clear that the tightening job market creates some degree of upward pressure on nominal wage growth. Given how many working families depend on their labor income, this relationship should establish full employment as a critical goal if we want to see the benefits of growth show up in workers’ paychecks.
Of course, what really matters to workers is the buying power of their paychecks, and this calls for inflation adjusting the wage data into so-called real dollars. Through much of 2015-16, tanking energy prices held inflation at unusually low levels, which combined with faster growth in nominal wages to drive real wages up quickly over the past few years. More recently, as energy prices have firmed up a bit, inflation has begun to climb back to more normal levels, and real wage growth has slowed.
So far, we’ve looked mostly at average wages (though there’s a median wage in the mash-up series), but what about middle- and low-wage workers’ paychecks? The figure below plots annual data on weekly earnings of full-time workers for low, middle, and high-paid workers (the 10th, 50th, and 90th percentiles; indexed to 100 in 2010 so they can be shown on the same scale). All three series grew over the past two years.
A few final figures show real wages for non-managerial and blue-collar workers (lower-paid workers) in a few key sectors, the “leisure and hospitality” sector (mostly hotels and food services), education and health services, and manufacturing. In each case, we see rising wages over the past few years, though recently, real wage trends have flattened, and blue-collar manufacturing workers have slightly lost ground in recent months. Note also the low level of real pay in the hotel/food services sector.
In sum, the combination of tighter job markets, faster nominal hourly wage growth and low inflation has increased the buying power of workers’ paychecks over the past couple of years, and not just for average workers, but for middle- and low-wage workers too. However, the job market is not at full capacity, as too many workers are under-utilized in one way or another, nominal wage growth remains at historically low levels, and real trends in some key sectors have been relatively flat recently. These factors, along with data on inflation (it’s rising a bit, as we’d expect at this stage, but not by much when you take out normalizing energy prices), point to a job market that is helping many workers find gainful opportunities with real wage gains, but without overheating and with some more room to run.
Technical data notes: Today’s report includes the annual benchmark revision to the payroll survey, wherein the BLS adjusts the establishment survey to hit benchmarks derived from more comprehensive counts of employment. The adjustment was -60,000, which was “wedged in” on a monthly basis from April 2015-March 2016 (so that the March level is now -60,000 jobs lower than before the revision). Today’s data also reflects the update of the weights, or “population controls,” in the household survey.
Also, real wage series use my forecasted value for the CPI in January 2017, as it hasn’t been released yet.