July 06, 2023
June Jobs Preview: What to Expect in the June Jobs Report
The job market has been looking much more normal in recent months, although it is still arguably creating jobs at a faster rate than can be sustained over any substantial period. Wage growth has slowed markedly from its pace at the start of 2022. The recent pace of wage growth, as measured by the Average Hourly Earnings series, is only slightly higher than what we saw in 2018-2019. If this story continues with the June data, the Fed should be getting to the point where it can declare victory over inflation.
Wage Growth – Continued Moderation
The Fed has repeatedly stated that it sees slower wage growth as central to its strategy for getting inflation back down to a pace consistent with its 2.0 percent target. It has largely succeeded in this effort, even if that fact has not been clearly acknowledged by the Fed itself.
The annualized rate of growth in the average hourly wage over the last three months was 4.1 percent. That is down from a peak of 6.4 percent for the three months ending in January of 2022. If we prefer a longer six-month interval, the annualized rate of inflation from November to May was 3.9 percent. By comparison, the rate of growth in the average hourly wage in the year prior to the start of the pandemic was 3.6 percent. Using this series, we are getting very close to a pace of wage growth consistent with 2.0 percent inflation.
However, some analysts have argued that the picture of slowing wage growth is less clear in the Employment Cost Index (ECI). The annual rate of growth in wages in the private sector in the ECI in the first quarter was 4.8 percent. That is only slightly below its peak of 5.5 percent in the first quarter of 2022.
There is good reason for taking the data on average wages from the establishment survey over the ECI. The establishment survey is based on a survey going to more than 600,000 establishments. The ECI survey only goes to 15,000 establishments. Furthermore, its response rate is under 50 percent. (The ECI is a fixed weight index, while the average wage index includes the effects of a changing labor market. However, this difference in concept cannot explain the gap between the surveys. In recent months, changes in composition have actually raised the rate of wage growth.)
The establishment survey is also consistent with the data in the BLS’s productivity and cost series, which shows hourly compensation rising just 3.0 percent over the last year. The data from labor-matching site Linkedin also shows a pattern of slowing wage growth consistent with the establishment data.
The June data will let us know whether this trend of wage moderation is continuing. If it is, it would be unfortunate if the Fed ignored these data in deference to the much smaller ECI.
Jobs and Hours
We have seen conflicting patterns in recent months between job growth in the establishment survey and hours worked. Over the last three months, the economy has created an average of 283,000 jobs. This pace is likely faster than can be sustained in an economy close to full employment.
However, the index of aggregate hours has actually been falling slightly, with the May level 0.2 percent below the January level. This is equivalent to a loss of more than 260,000 private sector jobs. The reduction in the length of the average workweek presumably means that employers no longer feel a need to have workers put in more hours due to an inability to find new workers.
It also means that the demand for labor is actually not rising rapidly, if it is even rising at all. It is important that this hours measure be given at least as much attention as the jobs number. Employers are not going to be continually reducing the length of the workweek. If they are not seeing an increase in demand for labor, hiring will slow.
The unemployment rate rose from 3.4 percent in April to 3.7 percent in May (actually, 3.65 percent). It’s likely that part of this increase was simply measurement error, with the April number perhaps slightly understating the true unemployment rate and the May number overstating it; but nonetheless, a 0.3 percentage point rise is concerning. If there is a further rise in June, then we would have to start worrying about the possibility we are entering a recession.
However, little else seems to be going in that direction. The establishment survey is showing very fast growth in jobs, we continue to see very low numbers for new and continuing unemployment claims, and there is no surge in layoffs in the JOLTS data. Most likely the May increase in unemployment was an anomaly, with the number likely to remain stable or even edge back down in June.
Labor Force Participation
The labor force participation rate (LFPR) for prime age workers (ages 25 to 54) is continuing to creep up, and is now 0.3 percentage points above its pre-pandemic peak. This is being driven by women’s LFPR, which is now at an all-time high and 0.6 percentage points above its pre-pandemic peak. The LFPR for men was 0.3 percentage points below its pre-pandemic peak. It still seems to be on its long downward trend.
We had record low Black unemployment in April, as the unemployment rate fell to 4.7 percent. The unemployment rate for Black workers jumped to 5.6 percent in May. It is likely that part of this increase was measurement error, but, in that case, we should expect to see some drop in June.
Unemployment Due to Voluntary Quits
The share of unemployment due to people voluntarily quitting their jobs hit a three decade high in September of last year at 15.8 percent. It has since fallen back sharply, and stood at 12.6 percent in May. This is still a relatively high share, but well below peaks hit before the pandemic or in the late 1990s boom. It will be cause for concern if it declines further in June.
Conclusion: A Strong and Stable Jobs Market?
The Fed wanted to slow the economy and weaken the labor market. This has certainly happened. Wage growth has slowed sharply, arguably to a pace that is consistent with the Fed’s target. The rate of job creation is way below the clearly unsustainable pace of 2022. If we measure labor demand by hours, then we are actually seeing a very modest rate of growth. If the labor market can stay where it is now, we would be in a place where jobs are relatively plentiful (although, crucially, still a problem for Black people and other disadvantaged groups) and real wages are rising at a decent pace. We will have to see whether the Fed’s past and future rate hikes ruin this picture.