June 03, 2022
We have been hearing endless screaming from the media about out of control inflation. It certainly is the case that inflation is higher than anyone feels comfortable with, and prices of gas and food are especially troublesome, since they are necessities for most families.
But the key question when we get a monthly job report is whether the situation is getting better or worse. Anyone looking at the May jobs report with clear eyes should have concluded the picture is getting better.
The issue with jobs and inflation is the concern that we will see a wage-price spiral like what we saw in the 1970s. The story there is that workers saw rising prices, to which they responded by demanding higher wages. This meant higher costs for businesses, leading to still higher inflation, and an even larger round of pay hikes.
The 1970s story of spiraling inflation is one where the rate of wage growth is increasing. The May data shows that the pace of wage growth is actually falling. The average hourly wage, the key measure of wage growth in the report, increased by 6.5 percent over the last year. That is a pace that is clearly inconsistent with a rate of inflation that most people would consider acceptable.
However, we get a much better picture if we focus on the more recent period. The annualized rate of wage growth comparing the last three months (March, April, and May) with the prior three months (December, January, and February) was 4.3 percent. This is only moderately higher than the peak 3.6 percent year over year rate of wage growth hit in February 2019. In 2019, inflation was well under control, with few seeing it as a serious problem.
Wage data are erratic (that is the reason for taking three-month averages), but it is clear that the direction of change based on the data we have is downward. This is the opposite of the wage-price spiral story, wage growth is moderating.
This is not the only item in the May jobs report that should help to calm the inflation hawks. One way that businesses responded to the difficulty in hiring workers earlier in the recovery was to increase the length of the workweek. The average workweek was 34.4 hours in 2019, before the pandemic. It peaked at 35.0 hours in January of 2021. That would be equivalent to hiring roughly 2.6 million workers at 34.4 hours a week.
The length of the average workweek has now shortened to 34.6 hours over the last three months. This suggests that employers no longer feel a need to lengthen hours to compensate for not being able to hire workers. Again, this is evidence that the labor market is stabilizing.
The third item that should calm inflation hawks is the drop in the share of unemployment due to people voluntarily quitting their jobs. This is an important measure, since workers will only quit their jobs before having a new one lined up, if they are confident they will be able to get another job.
The share of unemployment due to voluntary quits edged down to 12.8 percent in May. It had peaked at 15.1 percent in February, and since trended downward. The share of unemployment due to quits also reached levels above 15.0 percent just before the pandemic and in 2000. In short, this is not a labor market in which workers feel totally comfortable quitting their jobs.
In short, this is a jobs report that should have made inflation hawks very happy. It shows a strong, but stable, labor market with moderating wage growth. This is definitely not a wage-price spiral story.
Of course, this report does nothing to reduce the price of gas. If you’re concerned about the price of gas, then you need to pay attention to the war in Ukraine, not the US labor market. The world price of oil determines the price of gas here, not our employment levels.