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Labour market shortages stabilising

  • The upward revision to household employment and the labour force imply that the labour market recovery has been a little stronger than we previously believed, but measures of slack suggest that labour shortages have been stabilising in recent months and are consistent with wage growth dropping back.
  • The annual revisions to the Employment Report data altered our understanding of labour market conditions a little, but the big picture is still broadly the same. The 973,000 upward revision to the size of the population was accompanied by a 1,530,000 increase in the size of the labour force and a 1,471,000 increase in the household measure of employment. As a result, household employment is only 1.7 million below its pre-pandemic level now, with the labour force 0.9 million off. At the same time, the revisions to the establishment survey raised payroll employment by only 0.2 million, leaving it still 2.9 million below the pre-pandemic level. (See Chart 1.)
  • Since the labour force and household employment were revised up almost equally, that means the unemployment rate was mostly unchanged at 4% in January, a little above the 3.5% low reached immediately prior to the pandemic, but otherwise still unusually low when compared with the last few decades. (See Chart 2.)
  • The employment-to-population ratio is still well below its pre-pandemic level, implying that there is more slack in the labour market than the unemployment rate suggests. But, at this stage almost two years after the pandemic struck, the labour force exodus looks increasingly like a permanent structural shift. The longer those people remain out of the labour force, the less the chance that they will ever come back, particularly since many appear to have retired. (See here.)
  • The prime age participation rate is close to its average over the past decade but, because of all those retirements, the overall participation rate is likely to remain permanently lower. (See Chart 3.) In addition, the ageing of the population means that the participation rate has been on a downward structural trend for the past couple of decades, so we shouldn’t necessarily expect it to get back to its pre-pandemic level, which implies the employment-to-population rate will remain lower too.
  • Most of the various other survey evidence suggests that labour shortages are even worse than we would have expected with a 4% unemployment rate. (See Chart 4.) But nearly all those surveys also indicate that conditions have stabilised and may even be starting to improve. The job openings rate has been broadly unchanged in recent months and the small business jobs hard to fill index has fallen back. (See Chart 5.)
  • In addition, while the net jobs plentiful index from the Conference Board’s consumer confidence survey points to labour market conditions being tighter now than they were pre-pandemic, that index has been basically unchanged for the past few months. (See Chart 6.)
  • If labour market slack really is stabilising then that would have important implications for wage growth. As it stands, the voluntary job quit rate has stabilised at a level consistent with wage growth easing back from the current 5.0% to nearer 4.5%. (See Chart 7.)
  • Similarly, the latest NFIB small business survey shows a drop back in the proportion of small businesses planning to raise worker compensation, which is also consistent with wage growth dropping back from 5.0% to 4.5%. (See Chart 8.) The upshot is that, even though the Employment Report revisions suggest the employment and labour force shortfalls are smaller than previously believed, other measures of labour market slack indicate that shortages are stabilising and, as a result wage growth should drop back.
  • Admittedly, we still think that wage growth at 4.5% would be inconsistent with the 2% price inflation target given that we expect productivity growth to be near 1%. But, for the Fed at least, we suspect officials will expect productivity growth to run closer to 2%, which means that 4.5% wage growth could be consistent with price inflation running only slightly above 2%.

Chart 1: Employment & Labour Force (Mn)

Chart 2: Unemployment & Empl-to-Pop’n Rates (%)

Chart 3: Participation Rates (%)

Chart 4: Unemployment & Jobs Hard to Fill

Chart 5: Jobs Hard to Fill & Job Openings (%)

Chart 6: Unemployment & Net Jobs Plentiful

Chart 7: Wages & Voluntary Quit Rate

Chart 8: Wages & Plans to Raise Compensation

Source: Refinitiv

Paul Ashworth, Chief US Economist,

Paul Ashworth Chief North America Economist
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