July 02, 2024
(The Employment Situation is scheduled for release by the Bureau of Labor Statistics on Friday, July 5th at 8:30 AM Eastern Time.)
The establishment and household surveys are continuing to show diametrically opposed pictures of the labor market. The establishment survey shows a very strong labor market with the economy adding 272,000 jobs in May and 2,756,000 jobs over the last year. By contrast, the household survey showed a drop in employment of 408,000 in May and a total growth in employment over the last year of just 376,000.
The establishment survey is far larger, with a much higher response rate, so it usually will be closer to the mark, but the persistence of this large divergence is disconcerting. Most other data seem to fit better with the establishment survey. Although we are seeing evidence of a weakening labor market.
In the JOLT data, the rates for job openings and quits have both fallen back sharply from their peaks in 2022. However, they are still at levels that we saw just before the pandemic when the labor market was quite strong. The number of new unemployment insurance claims has risen but is still in line with pre-pandemic levels. The same applies to continuing claims.
These series and other data still support the view that the labor market remains strong. The unemployment rate has crept up from its low of 3.4 percent in April 2023 to 4.0 last month (actually 3.96 percent), but this is still low by historical standards. This rise is consistent with a healthy but gradually weakening labor market.
The most likely story is that the ratios in the household survey are close to right, but the levels substantially understate growth. As has been noted in the past, if the household survey proves to be closer to the mark, then productivity growth has been considerably more rapid than the data now indicate, which would be a pretty great story.
Unemployment: Are We Still Under 4.0 Percent?
This is really a point of trivia, we have now seen 28 consecutive months where the unemployment rate has been below 4.0 percent, beating the 27-month-long streak at the end of the 1960s. Any further rise will put an end to the streak, but as a practical matter, no one can tell the difference between a 4.0 percent and 3.96 percent unemployment rate. The more important question is whether unemployment is on an upward trend, with further weakening of the labor market.
Is Wage Growth Slowing Further?
Wage growth has slowed sharply from a peak, taking three-month averages, of 6.4 percent annual rate at the end of 2021. It has been roughly 4.0 percent for the last year. This may be slightly faster than a rate that is consistent with the Fed’s 2.0 percent inflation target. Wage growth averaged 3.3 percent in the two years prior to the pandemic, when inflation was slightly under the Fed’s target.
However, the profit share of income is still roughly 2.0 percentage points above its pre-pandemic level. We would need some period where wage growth is above the sustainable rate if we are to bring the profit share back to its pre-pandemic level, which was already well above its level at the turn of the century.
Hours and Productivity
Hours growth has been much weaker than job growth as there has been some reduction in the length of the average workweek. However, this is unlikely to continue as the labor market has largely returned to normal. We had weak productivity growth in the first quarter after three extraordinarily strong quarters in 2023. We will likely see modest GDP growth in the second quarter, so we would need weak growth in hours for a good productivity number.
Construction and Manufacturing Likely to Show Slower Growth
Historically these industries have been the most cyclical sectors of the economy, as they are highly responsive to interest rates. It has been surprising that they have continued to add jobs, and in the case of construction, at a very healthy pace.
Construction added 21,000 jobs in May, while manufacturing added 8,000. The figure for construction was in line with its pace over the last year, The manufacturing figure was somewhat higher than the near-zero average over the last year. We may see a reversal in June.
Health Care Likely to Lead Growth Again
The health care sector added 68,300 in May, in line with its 65,000 average over the last year. This pace will probably continue into June. The other major job gainers have been local governments and restaurants. Real spending in restaurants has stagnated this year after rising sharply in 2023. We may see weaker employment growth as a result. Many local governments are also seeing tighter budgets, as pandemic funding is exhausted, so job growth here will slow, but perhaps not in June.
Prime Age Employment Rate for Women Could Hit New Record High
The employment to population ratio (EPOP) for prime-age (25 to 54) women hit a new record high of 75.7 percent in May. It has been on an upward path throughout the recovery and that seems likely to continue. For men, the EPOP drifted down 0.1 percentage points to 86.0 percent, 0.7 percentage points below the pre-pandemic peak. The overall rate at 80.8 percent is 0.3 percentage points above the pre-pandemic peak, but still somewhat below peaks hit in 2000.
Unemployment Rate for Black Workers May Fall Back from May Level
The unemployment rate for Black workers rose by 0.5 percentage points to 6.1 percent in May. This is up from an all-time low of 4.8 percent last April. The data are erratic, and it is reasonable to expect at least part of this rise to be reversed in June. Nonetheless, it seems that the underlying rate of unemployment for Blacks is at least 0.5 percentage points higher than the lows hit in 2023.
Share of Unemployment Due to Voluntary Quits Is Likely to Rise in June
The share of unemployment due to people voluntarily quitting their jobs has been unusually low in the last year, given other measures of labor market strength. It fell to 10.8 percent in May, the lowest since September 2021. It averaged 13.1 percent in the two years before the pandemic.
While people may be quitting less frequently than in the past because they are more satisfied with their current jobs, this is still an unusually low share given other measures of the labor market’s strength. We should be seeing a higher share of unemployment due to voluntary quits.
Overall Picture: Continued Strength in the Labor Market
The story of the labor market in recent months has been overwhelmingly positive, as we see rapid job growth coupled with healthy wage growth. The rising unemployment rate is a cause for concern, but its current level is still very low by historical standards. There is nothing obvious to knock the economy off its current path.
CEPR produces same-day analyses of government data on employment, GDP, and other topics. Follow @DeanBaker13 on X to get his quick-take analysis of government data immediately upon release.
