November 30, 2022
The November jobs report should provide further evidence of the economy normalizing after its rapid bounce back from the pandemic recession. The big questions will be whether wage growth has slowed to a pace consistent with the Fed’s inflation target and whether job growth has slowed to a sustainable pace.
Wage Growth Likely to Remain Moderate
Hourly wage growth has already slowed sharply from 6.1 percent at the end of 2021 to 3.9 percent in October 2022 (annualized three-month change). The pace is likely to remain roughly the same with the November data.
Both the rate and direction of change are important here. Arguably the 3.9 percent pace is already consistent with the Fed’s 2 percent inflation target. There were many three-month periods in 2018 and 2019 when the annualized rate of wage growth was roughly the same, even as the inflation rate remained comfortably below the Fed’s target.
Also, there has been a large shift from wages to profits in the pandemic recession and recovery. If the conditions of competition have not been permanently altered by the pandemic, then we should expect some shift back to wages as the economy normalizes. This means that we should expect to see a somewhat more rapid pace of wage growth than would otherwise be consistent with the Fed’s target.
The direction of change is also hugely important for theories of inflation. If in fact the labor market is still too tight, the standard theories of inflation would have wage growth accelerating, not decelerating. There is always error in measurement and monthly data are erratic, but wage growth is unambiguously decelerating, as is clear from the average hourly earnings series and pretty much every other available wage measure.
Job Growth Will Slow
The October jobs growth number of 261,000 was somewhat faster than most analysts had predicted and is clearly faster than is sustainable with a labor force that is near full employment. While the sustainable pace of job growth in the current economy is unclear, it is almost certainly 200,000 and likely closer to 150,000.
With reports of layoffs and hiring freezes in several large companies, and an uptick in the number of new and continuing unemployment claims, it is likely that we will see a slower pace of job growth in November. This will be good news for those concerned about an excessively tight labor market, even if the pace may still be somewhat faster than is generally viewed as sustainable.
Productivity Growth and Hours Worked
Reported productivity for the first half of 2022 posted the sharpest two-quarter decline ever. These data are erratic and subject to substantial revisions, but there can be little doubt that productivity growth was very bad in the first half of the year. There are several plausible explanations, including supply chain problems and rapid employee turnover, but whatever the cause, falling productivity clearly adds to inflationary pressure.
Productivity growth turned to a modest positive in the third quarter. Slowing job growth, coupled with a stable average workweek, and a respectable pace of third quarter GDP growth, should mean a healthy productivity number for the fourth quarter. This will be another factor suggesting that inflation is coming under control.
Closing the Gap in the Household and Establishment Surveys
Many analysts have noted the weak employment growth shown in the household survey. In the seven months from March to October it has shown an increase in employment of just 150,000 people. Over the same period, the establishment survey has shown a gain of 2,450,000 jobs. While this gap is extraordinary, it is not unusual to see large differences in the two surveys’ measures of employment.
In fact, in the prior five months, from October of 2021 to March of 2022, the household survey showed employment increasing by 4,220,000, while the establishment survey reported a gain of 2,850,000 jobs. Part of this gap is explained by new population controls, which added 1,470,000 employed people in the household survey in January 2022.
However, this is not a quirk. If the new population controls were in fact more accurate than the ones being applied for 2021, then the household survey was seriously undercounting employment growth over the course of the year. We won’t know if that is an issue of comparable importance in 2022 until we see the new population controls, but this history should serve as a warning.
The household survey can be counted on to give us reasonably accurate measures of employment and unemployment rates, but its measures of levels are not very reliable. It is almost certainly the case that the job growth in the establishment survey is closer to the mark. (For those looking for an independent source of data on job growth, it is possible to back out job numbers using payroll tax receipts and adjusting for reporting wage and hour growth in the establishment survey.)
Labor Force Participation Rates
There has also been much discussion of the drop in the labor force participation rate (LFPR) from pre-pandemic levels. The overall rate in October was down by 1.2 percentage points from its pre-pandemic peak, however this is mostly due to the fact that the baby boom cohort is aging into retirement. The LFPR for prime age adults in October was down just 0.6 pp from its pre-pandemic peak and equal to its 2019 average. The October LFPR for 55-to-64 year olds was just 0.2 pp lower than its 2019 average.
There is simply not a plausible story of large numbers of people leaving the labor force for anything other than aging. However, it would still be desirable to see some rise in the LFPR, at least to pre-pandemic peaks.
Unemployment Due to Job Leavers
The percentage of unemployment due to people voluntarily quitting their jobs hit an all-time high in September. It then fell back to 14.6 percent in October. This is a high share, consistent with a strong labor market, but well within the range seen in prior periods of low unemployment. If it stays near this level it will be another signal of the labor market normalizing.
Job Growth in Relatively Low Paying Sectors
Employment in child care, nursing homes, and state and local government is still well below the pre-pandemic level. The first two are low-paying industries that have a tough time competing for workers in a tight labor market.
In the case of the government sector, pay has not generally kept pace with the private sector. Also, the difficulties associated with the pandemic have made government employment less attractive to many workers. If we are seeing more labor market slack, we may see more rapid job growth in these sectors.
Labor Market Still Strong, but Stabilizing
On the whole, we should expect to see another strong report, but hopefully one that looks more normal than we saw earlier in 2021. This should mean that we are approaching sustainable rates of job and wage growth.