Preview: Lower US Unemployment With Moderating Wage Growth – Analysis

The unemployment rate remained unchanged at 3.6 percent in April, despite strong job growth. I had expected some drop in the unemployment rate, especially given the strong job growth, but the household survey is always somewhat erratic.

All signs point to another good month of job growth in May; that should push the unemployment rate down to at least 3.5 percent, making it tie for the lowest rate since 1969. A 0.2 percentage point drop would give us the lowest rate in more than 50 years.

Wage Growth May be Moderating

The fear of an inflationary spiral depends on an accelerating pace of wage growth, which gets passed along in higher inflation rates, leading to further increases in the pace of wage growth. This does not appear to be happening.

Overall wage growth has been slowing in recent months. The average hourly wage was up 5.5 percent year-over-year in April but increased at a 4.4 percent annual rate when comparing the last three months (February-April) with the prior three months (November-January). 

This slowing was even sharper in low-paying sectors that had seen rapid wage growth. Wages for production and nonsupervisory workers in the leisure and hospitality sector rose at an 8.4 percent annual rate when comparing the last three months with the prior three months. This is down from a year-over-year increase of 12.6 percent.

The annualized rate of wage growth, comparing the most recent three months with the prior three, is likely to remain close to 4.4 percent with the May data. However, this pace of growth is not far out of line with a rate that would be consistent with moderate inflation. Year-over-year wage growth peaked at 3.6 percent before the pandemic, even as inflation remained well below the Fed’s 2.0 percent target.

Share of Unemployment Due to Voluntary Quits

The share of unemployment due to people who voluntarily quit their jobs indicates workers’ confidence in the labor market since it implies they are willing to leave a job even before they have a new one lined up. This figure peaked at 15.1 percent in February. It was 13.0 percent in March and 13.1 percent in April.

That is somewhat below the levels since before the pandemic. The share of unemployment due to quits averaged over 14.0 percent in the second half of 2019. If the number stays near 13.0 percent, it will be another indication of a weakening of the labor market.

Labor Force Participation Rates Approaching Pre-Pandemic Peaks

Labor force participation rates (LFPR) edged down slightly for most demographic groups in April, but they are still near pre-pandemic peaks. The employment-to-population ratio (EPOP) is often a better measure, since there is less ambiguity about whether someone is actually working than if they are looking for work.

For people between the ages of 25 to 34, the EPOP rose 0.2 percentage points to 80.2 percent, 0.4 percentage points below its pre-recession peak. For people between the ages of 35 and 44, the EPOP fell 0.4 percentage points to 80.6 percent, 0.8 percentage points below its pre-pandemic peak. And, for workers between the ages of 45 and 54, the EPOP fell 0.4 percentage points to 78.8 percent, 0.9 percentage points below the pre-pandemic peak.

It is likely that we will see further gains in the employment rate for all three age groups of prime age workers as the impact of the pandemic fades and we get closer to pre-pandemic peaks. The number of people who reported being out of the labor force due to COVID-19 fell to 590,000 in April, from over 800,000 in March. It is likely to fall further in May.

Average Weekly Hours

The length of the average workweek increased substantially during the pandemic, peaking at 35.0 hours in January of 2021. This is 1.7 percent higher than the 34.4-hour average workweek in 2019. The most obvious explanation for the rise is that employers increased hours when they were not able to add workers. The workweek fell back to 34.6 hours in March and April. We may see some further reduction in May as the labor market becomes somewhat looser. 

Further Reduction in Black and Hispanic Unemployment

The unemployment rate for Black workers fell by 3.8 percentage points over the last year, but at 5.9 percent, it is still close to twice the 3.2 percent rate for white workers. The unemployment rate for Hispanics fell by 3.6 percentage points to 4.1 percent.

Unemployment rates for both groups of workers are likely to fall further in May. The most disadvantaged groups benefit disproportionately from a tight labor market, just as they are hurt disproportionately by recessions. This means that we should see larger drops in unemployment for these groups than for white workers. The unemployment rate for Hispanics is just 0.1 percentage point below its pre-pandemic low, with the April figure for Blacks still 0.5 percentage points above lows hit in 2019.

Sectors With Low Wages Are Still Likely to Have Trouble Hiring

Sectors such as child care and nursing homes have had trouble attracting workers in the tight labor market. Both sectors had modest growth last month, but employment is still far below pre-pandemic levels. If the labor market is weakening, these sectors should have an easier time adding workers.

There is a similar story with state and local governments, where employment is still down by almost 700,000 from pre-pandemic levels, almost 59 percent of the shortfall in payroll employment. Job growth in state and local employment has averaged just over 20,000 a month over the last three months. At this pace, it would take almost three years to get to pre-pandemic employment levels.

Incorporated Self-Employment Jumped in April

The number of people who reported being self-employed (both incorporated and unincorporated) has been running well above pre-pandemic levels. Since this pattern has persisted even as the labor market has tightened, it is reasonable to believe this is by choice.

There was a jump of 356,000 (5.6 percent) in the number of incorporated self-employed in April. These data are erratic and could be reversed in May. But if some of the April increase shows up again, it would indicate an impressive rise in this category. Incorporated self-employed workers are generally more committed to their businesses than unincorporated.

May Should be Another Very Positive Month

An ideal job report would show strong job numbers, low unemployment, and evidence that the labor market is not overheating and getting the economy into a wage-price spiral. The April data fit this picture and the May report is likely to as well.

(The monthly Employment Situation is scheduled for release by the Bureau of Labor Statistics on Friday, June 3rd, at 8:30 AM Eastern Time.)

Source: This article was published by CEPR