(The monthly Employment Situation is scheduled for release by the Bureau of Labor Statistics on Friday, September 2nd, at 8:30 AM Eastern Time.)
The two big questions that the Federal Reserve Board, and just about everyone else, will be asking with the August jobs numbers are: “Is job growth slowing to a sustainable pace?” and “Is wage growth falling back to a more normal rate?”
The 528,000 new jobs reported for July pushed total employment above the pre-pandemic level, but it is clearly not a sustainable growth rate for an economy with a 3.5 percent unemployment rate. (The preliminary benchmark revisions announced this month indicate that we were actually above the pre-pandemic employment level in June.) The 0.5 percent wage growth reported for July, along with an upward revision to June data, brought the annual rate—comparing the last three months with the prior three months—to 5.0 percent.
Higher Unemployment Insurance Claims Could Mean Slower Job Growth
The number of weekly filings for unemployment insurance claims had inched up this summer to a low of under 170,000 in March to four-week average of 245,000 last week. While the March filing numbers suggested an extraordinary labor market where employers were scared to lose workers due to the difficulty of finding replacements, the more recent numbers are consistent with a still strong but more stable labor market.
The number of weekly claims was considerably lower through much of 2018 and 2019. These data, along with various employer surveys suggesting a slower rate of hiring, provide a reason for believing that job growth is likely to slow sharply in August.
How Fast Is Wage Growth Slowing?
The annual rate of wage growth, comparing three-month periods, peaked at 6.1 percent at the start of the year. Even with the strong July growth number and the upward revision to the June figure, it is still only growing at a 5.0 percent annual rate. While this is undoubtedly too fast to be consistent with the Fed’s target of 2.0 percent average inflation, it is markedly slower than where we were at the start of the year.
This is noteworthy since wage growth was slowing even with the tight labor market we saw in the first half of the year. This is not consistent with standard Phillips Curve models which predict that wage growth will only slow when we see a considerably higher unemployment rate.
Arguably, the periods involved are too short to give this slowing much credence. But the story is nonetheless one where wage growth is slower now than it was last fall and winter, even though the unemployment rate is at a 50-year low. This should at least raise some question as to the extent to which increases in the unemployment rate will be needed to slow wage growth and bring inflation down to an acceptable level. (The skewing from the addition of more low-wage jobs was more of a factor last fall and winter than in recent months, which means that the slowing of wage growth has been more rapid than the data indicate.)
The Divergence Between the Household and Establishment Surveys
Some commentators have been pointing to the divergence in job growth reported by the establishment and household surveys. This divergence grew larger in July, with the household survey showing an increase in the number of employed people of just 179,000. Since March, the household survey has shown an employment loss of 168,000, compared to an increase of 1,680,000 jobs reported in the establishment survey.
This sort of divergence is not unusual. From October to March, the establishment survey showed a gain of 2,851,000 jobs, while the household survey showed an increase in employment of 4,224,000 people. (Part of this was growth due to new population controls in the household survey put in place in January.) Anyhow, we often see substantial divergences in these surveys. Most analysts would agree that the establishment survey is the better measure of the growth in employment.
Labor Force Participation Rates
The labor force participation rate for prime-age workers (25 to 54) edged up to 82.4 percent in July. This is 0.7 percentage points below the pre-pandemic peak hit in January 2020, but just 0.1 percentage point below the year-round average for 2019. Much has been made of the drop in labor force participation, but it is not clear that there is very much to be explained.
The 3.5 percent unemployment rate reported for July tied a 50-year low in 2019. It is certainly possible that, even with slower job growth, we may see a further drop in this number. There also may be some progress among various demographic groups. There was a sharp drop in July in the reported unemployment rate for Hispanics which hit an all-time low of 3.9 percent. Black unemployment edged up by 0.2 percentage points to 6.0 percent, 0.6 percentage points above its pre-pandemic low.
Unemployment Due to Voluntary Quits
The share of unemployment attributable to people who voluntarily quit their jobs is seen as a measure of labor market strength since it shows the willingness of workers to leave a job before they have another lined up. This share rose to 14.8 percent in July. This is high but not out of line with levels reached in strong labor markets in the past. We hit peaks of more than 15.0 percent in 2000, 2019, and earlier this year. The direction of this figure will help tell us if we are seeing an out-of-control labor market.
Trends in Self-Employment
Through the first half of 2022 self-employment had been well above pre-pandemic levels. This was largely due to an increase in self-employment by women with young children and without college degrees. A big fall in self-employment reported for July eliminated much of the gain. The monthly data for self-employment are erratic, so it will be worth seeing whether the number of self-employed rises back to the June level or stays low in August.
Overall Picture: Continued Strength in the Labor Market
Likely, the August report will again show a very strong labor market. The big question is whether we are seeing a labor market that is strong and stable—similar to what we had before the pandemic—or one that is still destabilized as a result of the disruptions from the pandemic and the war in Ukraine.
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