I can remember few jobs reports that were as unambiguously positive as the data released last Friday. Just about everything in the report was moving in the right direction, and for the most part, at a rapid pace.
Most obviously, the economy created 914,000 jobs in March. In addition, the January and February numbers were revised up by a total of 156,000. There was a decline of 0.1 percentage points in the overall unemployment rate, with the employment to population ratio rising by the same amount. The improvements were pretty much across the board. The unemployment rate for Blacks fell by 0.3 percentage points, the unemployment rate for Hispanics dropped by 0.6 percentage points, and the unemployment rate for workers with just a high school degree fell by 0.5 percentage points.
But to say things are moving in the right direction does not mean that they are good. We are still down 8.4 million jobs from last February, and if we add in the jobs that should have been created over this period, we are missing more than 10 million jobs. Six percent unemployment means 9.7 million people are looking for work and can’t find it. In addition, another 4.7 million have dropped out of the labor force, either because they have given up hope of finding a job or because family responsibilities in the pandemic are keeping them from working.
It also continues to be striking how concentrated the unemployment is. The share of long-term unemployed (more than 26 weeks) rose to 43.4 percent in March, a level exceeded by only a few months in the Great Recession and never reached before the Great Recession. Typically, unemployment is spread more widely, with many workers experiencing stretches of two or three months. This percentage of long-term unemployment indicates that many people lost their jobs near the start of the pandemic and have not been rehired.
Grounds for Optimism
With all appropriate cautions, it is still hard not to see things looking pretty bright for the immediate future and even better if Biden’s infrastructure package is approved. Just to start, while we certainly should not be happy about a 6.0 percent unemployment rate, in the recovery following the Great Recession, the unemployment rate did not fall below 6.0 percent until September of 2014, so we are way ahead of that recovery.
But more importantly, we are likely to continue to see very rapid job growth in the immediate future. With the vaccination campaign moving along very rapidly, people will feel more comfortable going to restaurants and other public places. And, we know that state and local governments are removing pandemic restrictions (possibly too rapidly).
OpenTable reports that restaurant reservations were down by an average of just over 21 percent in the last seven days compared with 2019 levels. If we go back two months, the drop compared to 2019 was more than 53 percent. The restaurant industry added 176,000 jobs in March. It can easily add twice this many in April.
The state and local government sectors are also almost certain to be big job gainers in April. Biden’s recovery plan gave them the money needed to make up their budget shortfalls and rehire workers who were laid off. Also, with most schools returning to in-person instruction, many more teachers will be back to work. This sector added 129,000 jobs in March, and it will add far more in April.
Other sectors that have been badly depressed, like hotels, live entertainment, health care, and even air transportation will surely add large numbers of jobs in April. It will be several more months until these sectors are near their pre-pandemic employment levels, but we are seeing very rapid progress towards that point.
In short, April is likely to look a lot like March in terms of job growth, and we likely will continue to see strong job growth through the rest of the year. We will probably not approach our pre-pandemic employment path until some time in 2022, but the economy is getting better quickly.
Another very encouraging part of the picture is that wage growth has held up remarkably well through the recession. The average hourly wage for production and non-supervisory workers rose at a 3.4 percent annual rate, comparing the last three months (January, February, March) with the prior three months (October, November, December).
This is essentially the same as the pre-pandemic pace. This is a major departure from the pattern we saw in the Great Recession, where wage growth slowed sharply due to the weakness in the labor market. (The changing composition of the workforce would not have a major effect on wage growth over this period. To the extent it did, it would have slowed growth slightly.)
If wage growth continues at this pace it would mean that workers are seeing modest gains in real wages, with inflation still under 2.0 percent. There is the risk that inflation will rise, limiting real wage gains. To some extent, a rise in inflation is a virtual certainty as sharp price drops in sectors like hotels, airfares, and car insurance are reversed.
But these would be just one-time increases. The concern that Larry Summers and others have raised is that we get a cycle of price increases, driven by wage increases, as we saw in the 1970s. If this sort of wage-price spiral develops, it is difficult to say what will happen with real wages.
In the past, I have argued that we are not likely to see this sort of wage-price spiral, first and foremost because the economy is far more internationalized than in the 1970s. I also pointed out that unions are far weaker, which means that if we did start to see a serious uptick in inflation, it is not clear that workers would be able to secure wage gains to offset higher prices.
But the March jobs report also gives us good news on the other key factor in the inflation story: productivity growth. There was a sharp uptick in productivity growth in 2020, with productivity rising 2.5 percent from the fourth quarter of 2019 to the fourth quarter of 2020. This compares to an annual growth rate of just 1.0 percent over the prior decade.
With the March data indicating that hours worked grew at around a 2.5 percent annual rate in the first quarter and with GDP growth projected to be in the range of 5.0 to 6.0 percent for the quarter, it is likely that productivity growth will be at least 2.5 percent for the first quarter. This means the more rapid productivity growth of 2020 is continuing for the moment.
Productivity data are erratic, and it is far too soon to assume a new trend of faster growth. (Economists are horrible at predicting productivity growth or even understanding changes in trends after the fact.) However, if we are in fact on a path of faster productivity growth, it is a huge deal. It means both that we have far less reason to be concerned about inflation and that workers can enjoy more rapid gains in living standards if they share in the benefits of more rapid productivity growth.
The simple arithmetic is that if we sustain a 2.5 percent rate of productivity growth, nominal wages can rise at a rate of 4.5 percent annually, with inflation remaining stable at 2.0 percent. There will always be factors, such as rising or falling import prices, which complicate this picture, but there is much less reason to fear inflation if productivity rises rapidly.
It’s still way too early to start the celebrations. First, we certainly don’t know that the more rapid pace of productivity growth will continue. Second, we know the Republicans will do everything in their power to try to sabotage the recovery, so they can blame Biden and the Democrats in 2022 and 2024. Many people are still suffering from the effects of the recession, and, of course, many people are still getting sick and dying from Covid.
And, the biggest risk to this happy picture remains the threat of a new vaccine-resistant strain developing and spreading around the world. This points again to the urgency of not only getting people in the United States vaccinated as quickly as possible but also getting the whole world vaccinated in order to contain the pandemic.
If a new vaccine-resistant strain develops anywhere, it is almost certain to spread. And then we will be back at ground zero with more deaths and shutdowns until we can again develop vaccines to protect us. Biden, as well as the leaders of other major countries, must take this risk very seriously and do everything possible to ensure that the battle against the pandemic does not go into extra innings.