April 07, 2023
The March employment report gave clear evidence that the Fed’s rate hikes are weakening the labor market. Job growth was strong—with 236,000 jobs created—but the index of aggregate hours fell for the second consecutive month. Perhaps most importantly, wage growth slowed further, with the average hourly wage rising at just a 3.2 percent annual rate over the last three months.
The current pace of wage growth is well below what we saw in the period before the pandemic when the inflation rate was running below the Fed’s 2.0 percent target. With productivity growth averaging close to 1.4 percent and the current slower pace of wage growth, it is very difficult to envision a story of a sustained inflation rate above the Fed’s target. If the goal of the Fed’s rate hikes was to get wage growth down to a non-inflationary pace, it seems to have accomplished its mission.
Job Growth Still Strong in March
The 236,000 jobs created in March are still solid by any measure. With modest downward revisions to the prior two months’ data, the average for the last three months is 345,000.
We are seeing a clear change in the mix of jobs. The highly cyclical construction and manufacturing sectors both shed jobs, although the drops were small. Construction lost 9,000 jobs, with residential construction responsible for the 7,000 lost jobs. Manufacturing reported a drop of 1,000 jobs, but the traditionally more cyclical durable goods sector added 1,000. Retail lost 14,600 jobs, with building material stores and furniture stores losing 8,500 and 8,700 jobs, respectively.
Restaurants were the big job gainers, adding 50,300 jobs. State and local governments together added 39,000 jobs, while health care added 33,900 jobs. State government employment is still 2.5 percent below its pre-pandemic level; local government employment is down 1.6 percent since then.
Aggregate Hours Drop Due to a Decline in the Length of the Average Workweek
The drop in aggregate hours is noteworthy for several reasons. First, changing hours per worker and changing the number of workers are alternative ways to meet the demand for labor. The weakness in the aggregate hour index shows that demand for labor is not rising rapidly, in spite of the large jump in payrolls. In fact, since October the index of aggregate hours has risen by just over 0.4 percent.
The length of the average workweek can also be a measure of the difficulty employers have in finding workers. In late 2021 and the start of 2022, we saw extraordinarily long work weeks as employers responded to the inability to find new workers by working their existing workforce more hours.
Finally, a shortening of the workweek may be a precursor to layoffs. Employers will often reduce hours in response to a reduction in demand before turning to layoffs. This means the shortening of the average workweek can be a warning that layoffs will be increasing in the months ahead.
Unemployment Falls to 3.5 Percent and Employment Rate Hits Post-Pandemic High
The news in the household survey was overwhelmingly positive. The unemployment rate fell back to 3.5 percent, near the half-century low hit in January. This was due to a jump of 577,000 in the number of people employed, as the employment-to-population ratio (EPOP) rose by 0.2 pp to 60.4 percent, a post-pandemic high.
The EPOP for prime-age workers (ages 25 to 54) also rose by 0.2 pp to 80.7 percent, putting it 0.1 pp above its pre-pandemic peak. The EPOP for prime-age men is still 0.3 pp below its pre-pandemic peak, while for women it is 0.2 pp higher.
Unemployment for Black Workers and Black Women Hit Record Lows
The unemployment rate for Black workers fell to 5 percent in March, the lowest rate on record. The unemployment rate for Black women fell to 4.2 percent, also a record low. Groups facing discrimination in the labor market disproportionately benefit from low unemployment.
Self-Employment Remains Well Above Pre-Pandemic Levels
The monthly data on self-employment are erratic, but if we compare the first three months of 2023 with the first three months of 2019, both incorporated and unincorporated self-employment are well above the pre-pandemic level. For the incorporated self-employed, the increase is 6.9 percent. The rise for the unincorporated self-employed is 4.1 percent. This indicates that workers are sticking with the new businesses they started during the pandemic.
Share of Unemployment Due to Voluntary Quits Falls to 14.2 Percent
The share of unemployment due to people who chose to leave their job fell to 14.2 percent in March. This is well below the 15.8 percent peak we saw in September and lower than the peak levels we saw before the pandemic. The willingness to quit a job before having a new job lined up is an important indicator of workers’ confidence in the strength of the labor market. The March reading is still strong, but hardly evidence of an overheating labor market.
Nursing Homes and Day Care Centers Again Add Jobs
Nursing homes and daycare centers had difficulty finding workers earlier in the recovery since both are low-paying sectors with demanding work. The sectors added 3,400 and 3,900 jobs in March, respectively. Employment in nursing homes is now down by 12.2 percent from its pre-pandemic level, while employment is down by 5.4 percent in daycare centers.
Another Strong Job Report, but Clear Evidence of Slowing
There is not much in the March jobs report to complain about. With unemployment still near a half-century low, most workers are finding it much easier to find jobs than would ordinarily be the case. The record low unemployment rate for Black workers and Black women also means that disadvantaged groups are clearly benefiting from the tight labor market.
The overall pace of job growth continues to be very strong, but the decline in aggregate hours is worrying. The hours’ data are erratic and subject to large revisions, so the picture may look different in the April data, but the growth in hours in recent months certainly does not suggest an overly strong labor market.
Finally, the slower wage growth means that for the moment workers’ pay is not keeping pace with inflation. However, this should be positive from the standpoint of future rate hikes from the Fed. It is very difficult to construct a story of persistent inflation when wages are growing at an annual rate of just 3.2 percent. This should mean the end of the Fed’s rate hikes.
The annual rate of wage growth over the last three months was just 3.2 percent, a slower pace than we saw prior to the pandemic when inflation was below the Fed’s target.