Most of the data going into the new year suggest that the economy and the labor market are still looking very healthy. The big question in the January report will be whether the labor market has settled into a place where job and wage growth are both slow enough to be consistent with the Fed’s 2 percent inflation target. Arguably, we were already there with the December report, but given how erratic the month-to-month changes can be, and the large revisions to prior months’ data, another month of data will be very useful in establishing the case.
Fed chair Jerome Powell has indicated that he sees a slower pace of wage growth as central to his efforts to slow inflation. Last month, there was a sharp downward revision to the wage figure originally reported for November. This revision, coupled with a modest pace of wage growth reported for December, brought the annualized rate for the prior three months to just 4.1 percent.
This is a pace arguably consistent with the Fed’s 2 percent inflation target. There were stretches in 2018 and 2019 where we had the same pace of wage growth, even as inflation remained under 2.0 percent. Also, it appears as though some of the pandemic shift to profits is being reversed as businesses are being forced to cut prices to unload inventory. This should allow for more room for wage growth for at least a short period of time.
It is worth noting that the implied growth of hourly compensation in the 4th quarter GDP data was even lower. Total labor compensation grew at just a 4.9 percent annual rate. If aggregate hours grew at a 1.5 percent rate, this implies a 3.4 percent rate of growth in the average hourly wage.
Unemployment Due to Voluntary Quits
The share of unemployment due to people leaving their jobs has historically been a good measure of labor market strength. It hit an all-time high of 15.8 percent in September, and then fell back in subsequent months. It increased by 0.5 pp to 14.4 percent in December, which is normal for a strong labor market.
Hours and Productivity Growth
An aspect of the inflation picture that has not gotten the attention it deserves is the pattern we’ve seen in productivity growth. Reported productivity growth was negative in the first half of 2022. It was a modest 0.8 percent in the third quarter and is likely to be somewhat better in the fourth quarter.
The length of the average workweek increased in the pandemic as employers struggling to find workers had their workers put in more hours. It is now back to its pre-pandemic length. It will be important to see how the length of the workweek changes, both as a measure of labor demand (shortening workweeks may precede layoffs) and also for its impact on aggregate hours. If slow growth in aggregate hours is again coupled with strong GDP growth, it will imply another good quarter for productivity.
The productivity data are erratic, but growth was clearly weak in the first half of the year, which created considerable inflationary pressure. If we are again on a healthy productivity growth path it will be an important factor restraining inflation going forward.
Will Job Growth be Broadly Based?
The economy added 223,000 jobs in December, but half of the gains came from just two sectors: leisure and hospitality, and health care. It is likely that the trend to slower overall job growth will continue, with the January number likely coming in closer to 200,000. That may still be somewhat faster than is sustainable over the long-term in an economy near full employment, but not hugely faster.
It will also be important to see whether traditionally cyclical sectors are still adding jobs. Construction added 28,000 jobs in December, with even the residential sector still showing gains. This likely reflects the backlog of unfinished houses, which should last well into the year. Growth in manufacturing slowed to 8,000 in December and may slow further or even turn negative in January. Employment services lost 39,700 jobs last month, but this sector has not been an especially good predictor of future job growth in the last decade.
The retail sector had weak growth of just 9,000 in December, with department stores actually losing jobs. This may reflect changes in seasonal hiring patterns, which could mean a stronger January as fewer workers are laid off.
Gap Between Establishment and Household Surveys
There was an extraordinarily large gap between job growth shown in the establishment survey and employment growth in the household survey in 2022, with the former showing job gains that were 1.34 million higher than employment growth in the household survey. Only a small amount of this gap can be explained by technical distinctions, like self-employment not being covered in the household survey, or multiple job holders only being counted once.
The December data reduced the gap, as the household survey showed an increase in employment of 717,000 in the month. However, the gap is still quite large.
We will see annual revisions to both series with the January data. The establishment survey will have its benchmark revision, based on the near census from state unemployment insurance filings. We already know from the preliminary benchmark that this will show roughly 460,000 more jobs as of March 2022, the benchmark month. This will make the gap between the surveys somewhat larger.
The household survey will be adjusted based on new population controls. These have generally raised reported employment growth, which reduces the gap. These new controls could give us a very different picture of labor force composition and trends in labor force participation over the recovery.
Employment Growth in Social Services and Government
Nursing homes and child care centers saw sharp drops in employment in the pandemic. These sectors are both low-paying and also can be very demanding on workers. In recent months, these industries have seen modest job gains, but employment is still far below pre-pandemic levels. Whether this growth continues tells us both about the state of the labor market and also whether these sectors are increasing their capacity to provide important services.
State and, especially local, government, employment is still below pre-pandemic levels. These sectors have had difficulty matching wage gains in the private sector. Also, political factors have made many government jobs, notably teaching, considerably more difficult.
As of December, government employment at all levels was down by 440,000 from its pre-pandemic level. The benchmark revision will reduce government employment by roughly 110,000, making the shortfall even larger.
Healthy Stable Labor Market
We have been seeing the labor market normalize after extraordinary job growth in the bounce back from the pandemic recession. Recent job reports seem to indicate that jobs and wages are now growing at a stable and healthy pace. We will be looking for that to continue with the January release.
This first appeared on Dean Baker’s Beat the Press blog.