UBS | A below -consensus payroll print and a 37,000 increase in the pace of initial claims reported in May have caused some to question the health of the US labor market. We examine why these worries are unfounded and how, if anything, these signs of “weakness” may actually be signs that wage growth could soon begin to accelerate.
The devil is in the details
The “disappointing” 160,000 job add in April was still well above the likely “breakeven” level of growth required to hold the unemployment rate constant. As such, even a string of gains at this level would continue to push the unemployment rate lower. Our credit-based measure of job growth continues to point toward 150,000 per month payroll gains in 2016. Additionally, continued payroll expansion seems likely as we see limited scope for a further expansion of the workweek from these levels. Indeed, the high level of job openings relative to new hires may suggest an inability of firms to find labor at the price they are attempting to pay.
Temporary factors appear to have boosted claims of late. That said, even if the rise in claims is real, the level of claims as a percentage of the eligible workforce remains historically low (Fig 3) and our other “canaries ” show no signs of fading in sympathy. If claims are rising and employment gain s hold near the recent rate, it may suggest that firms are beginning to “trade up” in quality, which should be a positive for wages.
Slack?
We see falling levels of slack in the labor market. Although there may be some month – to-month volatility in the part icipation rate, a sustained rebound back above 63% seems unlikely given ongoing demographic shifts. Neither should we expect significant further declines in the number of part-time employees. Although elevated from a pre- crisis level of 3.0%, at 3.9% the percentage of workers who are involuntary part-time workers is now below its long -term average of 4.1%. Likewise, the percentage of workers who are part-time because they could only find part -time work is, at 1.3%, below its long-term level of 1.4%.
Other evidence also suggests that slack is dissipating. Pre-crisis the record number of job openings relative to the workforce would be consistent with an unemployment rate below 4%. However, post -crisis it is consistent with an unemployment rate just ab ove 5%. The reason appears to be the elevated number of long -term unemployed, who may not be “readily available for work” and who may make the slack in the labor market appear greater than it is.
Why aren’t wages going up?
Despite labor market tightness wages have not been rising as quickly as we would have expected. Why are wages not moving up more quickly? We see four possible reasons. First, some wage measures may be mis -measured (see: Are US wages being lowered by demographics? ). Second, we may be in the payback period for the period of nominal wage rigidity seen during the crisis. This implies that, when wages move, they could move rapidly. Third, workers may not have felt pressure to demand higher wages given the real wage gains/gains in their standard of living. Finally, given the extreme nature of the downturn workers may have been less willing to quit as the recovery progressed, thereby limiting their ability to obtain higher wages for some period of time.
*Image: Flickr / Eric Soler
