Jobs Report Could Signal a Real Turning Point
(Bloomberg View) -- The monthly jobs report is a big event the day it is released, and then is usually quickly forgotten. Given how difficult it is to extract the labor market’s trend from any one month’s set of data, this is how it should be.
But the jobs report for January — released this morning — might be different. It might resonate into the future. Why? Because the data in it show that workers are finally seeing wage growth accelerate.
This acceleration has been long-awaited. One of the mysteries of the recovery from the Great Recession has been how the economy can consistently add over 150,000 jobs each month and the unemployment rate can fall a whopping 6 percentage points without a significant acceleration in wage growth. If January 2018 is the start of a new trend, then the mystery may partially resolve itself.
The details: The economy added 200,000 jobs last month, handily beating the consensus expectation of forecasters. The unemployment rate remained unchanged at a low 4.1 percent. Average hourly earnings of private (nonfarm) payroll employees clocked in at $26.74, an increase of 2.9 percent relative to last January. That pace of wage growth is not only looking reasonably healthy, but also marks the best performance since the end of the Great Recession over eight years ago.
In addition, another measure of wage growth released this week, less volatile than the data in the monthly jobs report, also showed the fastest wage growth since the recession ended.
This welcome development presents four important questions.
Is this the start of a trend? It’s impossible to say for sure, and it’s always important not to read too much into any one month’s numbers. But based on a broad range of labor-market indicators, my expectation is that wage growth will accelerate in 2018.
My view is related to the second question: Are we at full employment?
No, not quite yet. The rate at which individuals in their prime working years — ages 25 to 54 — participate in the labor market has not fully recovered from the recession. The same is true for this group’s rate of employment. The number of workers employed in part-time jobs who want full-time work is still elevated. (And, importantly, we haven’t yet seen sustained acceleration in wage growth.)
In other words, there are still workers on the sidelines. Employers know that, and their wage offerings have been less attractive because of it. But as the labor market gets tighter and tighter, employers will need to pick up the pace of their wage offerings in order to attract new workers and keep the workers they have.
Higher wages will accrue to the benefit of continuing workers. But more attractive wage offerings, along with further labor-market strengthening, will also help to draw individuals of prime working age back into jobs. Employment growth in several industries that hire workers without a college degree has been strengthening. And we are already seeing some evidence that the tightening labor market is making employers increasingly willing to consider hiring workers with criminal records.
Third question: What about price inflation? It’s hard to infer what will happen with consumer prices based on changes in worker wages. And many have argued that a falling unemployment rate no longer translates into significant acceleration in consumer prices. But if the labor market still contains some slack, then the unemployment rate may not be low enough to have a big impact on prices. If the unemployment rate falls from its current 4.1 percent into the threes — which I expect it will, given existing slack — then prices should pick up.
Which brings us to our final question. What does all this mean for the Fed? Today’s good news makes it more likely that the central bank will increase the pace of interest rate hikes. But we will have a new Fed chair, and we haven’t seen him in action at the helm. How will Chairman Jay Powell react to today’s labor market data? All eyes will be watching.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Michael R. Strain is a Bloomberg View columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute. He is the editor of “The U.S. Labor Market: Questions and Challenges for Public Policy” and the co-editor of “Economic Freedom and Human Flourishing: Perspectives from Political Philosophy.”
To contact the editor responsible for this story: Katy Roberts at kroberts29@bloomberg.net.
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