When I was in London recently, I was repeatedly assailed with the idea that the…
On January 10, 2020, the US Bureau of Labor Statistics (BLS) released their latest labour market data – Employment Situation Summary – January 2019 – which reveals a labour market that that is still adding jobs, albeit at a slower rate than it was last year. The December performance showed that this moderation has not yet impacted on the unemployment rate – meaning that the employment growth is keeping pace with the underlying population growth with participation steady as indicated by the steady employment-population ratio. The Broad labour underutilisation ratio (U-6) remains high (but fell in December by 0.2 points) and the official unemployment is now hovering around levels not seen since the late 1960s. The U-6 indicator fell because underemployed workers are finding low-wage jobs in the service sector. Wages growth fell below the 3 per cent level for the first time since mid-2018 and real wages growth failed to match annual productivity growth. The worry is that the jobs being added represent a significant hollowing out of jobs in the median wage area (the so-called ‘middle-class’ jobs), which is reinforcing the polarisation in the income distribution and rising inequality. There is no hint, yet in the data, that a recession is coming any time soon or that that US labour market is at full employment despite the low unemployment rate.
Overview for December 2019
- Payroll employment rose by 145,000 – well below the 2019 monthly average.
- Total labour force survey employment rose by 267 thousand net (0.17 per cent).
- The seasonally adjusted labour force rose by 209 thousand (0.13 per cent).
- Official unemployment fell by 58 thousand to 5,753 thousand.
- The official unemployment rate remained largely unchanged at 3.50 per cent (-0.04 points).
- The participation rate was steady at 63.2 per cent but remains well below the peak in December 2006 (66.4 per cent). Adjusting for age effects, the rise in those who have given up looking for work for one reason or another since December 2006 is around 2,188.5 thousand workers. The corresponding unemployment rate would be 4.76 per cent, far higher than the current official rate.
- The broad labour underutilisation measure (U6) fell by 0.2 points to 6.7 per cent largely because of a decline in the number in the part-time for economic reasons cohort (the US indicator of underemployment).
For those who are confused about the difference between the payroll (establishment) data and the household survey data you should read this blog post – US labour market is in a deplorable state – where I explain the differences in detail.
1. The payroll figures were weaker. But, they should be seen in the context of last month’s stronger results. Thus there is some volatility in the US labour market.
2. Overall, given what is happening in the global context (trade war, etc), the US labour market is maintaining growth.
3. But, the composition of employment is shifting – there were job losses in the high-wage sectors (Mining and Manufacturing), which were more than offset by the gains in the service sector – biasing the overall result to low-wage, precarious jobs.
4. The indicators of labour underutilisation are heading downwards, but, as we have noted often, this doesn’t tell us about job quality or better earnings outcomes.
5. The decline in underemployment came from the growth in the service sector mopping up workers who were part-time for economic reasons, rather than choice.
6. Annual average earnings rose by only 2.9 per cent (down from 3.1 per cent), which is the first time it has fallen below 3 per cent since July 2018.
7. Overall, the indicators are not giving us a very good signal of where the labour market is at.
Payroll employment trends
The BLS noted that:
Total nonfarm payroll employment increased by 145,000 in December. Notable job gains occurred in retail trade and health care, while mining lost jobs. In 2019, payroll employment rose by 2.1 million, down from a gain of 2.7 million in 2018.
The first graph shows the monthly change in payroll employment (in thousands, expressed as a 3-month moving average to take out the monthly noise). The gray lines are the annual averages.
This month saw the change in payroll employment rise well above the average monthly change for the year to date.
The next graph shows the same data in a different way – in this case the graph shows the average net monthly change in payroll employment (actual) for the calendar years from 2005 to 2019 (the 2019 average being for the first 11 months at this stage).
The red diamond is the current month’s increase.
The slowdown that began in 2015 continued through 2017 was reversed last year. The 2018 average was 223 thousand compared to 179 thousand in 2017.
The final average for 2019 was 176 thousand.
The December result is weaker in a year of weaker job additions.
To put the current recovery into historical perspective the following graph shows the average annual growth in payroll employment since 1960 (blue columns) with the decade averages shown by the red line.
It reinforces the view that while payroll employment growth has been steady since the crisis ended, it is still well down on previous decades of growth.
Labour Force Survey – employment growth remains positive
Employment as measured by the household survey rose by 267 thousand net (0.175 per cent) while the labour force rose by 209 thousand (0.13 per cent).
As a result (in accounting terms), total unemployment fell by 58 thousand and the unemployment rate remained largely unchanged at 3.5 per cent (-0.04 point). The last time the unemployment rate was this low was in August 1969.
The next graph shows the monthly employment growth since January 2008. The red line is the average labour force growth over the period December 2001 to December 2006 (0.09 per cent per month).
1. There is still no coherent positive and reinforcing trend in employment growth since the recovery began back in 2009. There are still many months where employment growth, while positive, remains relatively weak when compared to the average labour force growth prior to the crisis or is negative.
There are also months where employment growth is negative.
2. Contrary to the message from the payroll data, the labour force survey data is showing a slightly stronger situation.
A good measure of the strength of the labour market is the Employment-Population ratio given that the movements are relatively unambiguous because the denominator population is not particularly sensitive to the cycle (unlike the labour force).
The following graph shows the US Employment-Population from January 1948 to December 2019. While the ratio fluctuates a little, the December 2019 ratio was unchanged at 61 per cent and held that level since September 2019.
Over the longer period though, we see that the ratio remains well down on pre-GFC levels (peak 63.4 per cent in December 2006), which is a further indication of how weak the recovery has been so far and the distance that the US labour market is from being at full capacity (assuming that the December 2006 level was closer to that state).
It is usually a positive sign though when total employment outstrips or keeps up with the underlying growth in the working age population.
Unemployment and underutilisation trends
The first graph shows the official unemployment rate since January 1950 which is currently at 3.5 per cent, slightly lower than the previous month.
It is clear that the US labour market is reaching unemployment rates not seen since the late 1960s.
With inflation stable, the continued low unemployment rates make a mockery of official NAIRU estimates of full employment coinciding with an unemployment rate of 4.6 per cent.
The official unemployment rate is a narrow measure of labour wastage, which means that a strict comparison with the 1960s, for example, in terms of how tight the labour market, has to take into account broader measures of labour underutilisation.
The next graph shows the BLS measure U6, which is defined as:
Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a percent of all civilian labor force plus all marginally attached workers.
It is thus the broadest quantitative measure of labour underutilisation that the BLS publish.
In December 2006, before the effects of the slowdown started to impact upon the labour market, the measure was estimated to be 7.9 per cent.
In December 2019 the U6 measure fell by 0.2 points to 6.7 per cent. This was the result of the category ‘Part-time for economic reasons’ – a measure of underemployment in the US data context) falling by 140 thousand or 3.3 per cent.
U-6 was 8.0 per cent at the beginning of 2019.
The U-6 measure is now below the pre-GFC level, and, while, signalling improvement, there is still some scope to go before full capacity is reached.
Feature this month: Wage movements
One of the ways of assessing whether the US economy is close to full employment is to examine the growth in wages, which tells us whether the supply-side of the labour market (workers) is enjoying gains in bargaining power.
The other indicator is the rate at which workers are quitting their jobs, which provides a signal of mobility and confidence among workers. The most recent data is not yet available.
The BLS reported that:
In December, average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents to $28.32. Over the last 12 months, average hourly earnings have increased by 2.9 percent. In December, average hourly earnings of private-sector production and nonsupervisory employees, at $23.79, were little changed (+2 cents).
The following graph shows the annual hourly earnings growth for all private employees since March 2007.
The recent trend is downwards and dispels any notion that the US has reached the end of their expansionary capacity.
Noting that the above graph is in nominal terms – the BLS Real Earnings Summary – tells us that:
Real average hourly earnings for all employees were unchanged from October to November, seasonally adjusted … This result stems from an increase of 0.2
percent in average hourly earnings combined with an increase of 0.3 percent in the Consumer Price Index for All Urban Consumers (CPI-U) …
Real average hourly earnings increased 1.1 percent, seasonally adjusted, from November 2018 to November 2019.
And, from the – BLS Productivity and Costs, Third Quarter 2019, Revised – report we find that:
From the third quarter of 2018 to the third quarter of 2019, productivity increased 1.5 percent, reflecting a 2.3-percent increase in output and a 0.9-percent increase in hours worked.
So real hourly earnings growth lagged behind the annual productivity growth by 0.4 percentage points, which is another sign of labour market slack and weak bargaining power.
The following graph shows movements in real average hourly earnings (indexed at 100 the pre-GFC peak – November 2006) up to November 2019.
The faster growth as the recovery gained speed ended in early 2016. A more recent growth spurt is observed over the first half of 2017.
But that has now given way to declining growth in real wages.
The real hourly index has been static in the last several months of 2019.
The December 2019 US BLS labour market data release tells me that the US labour market remains below the performance achieved in 2018 although there has been considerable month-to-month volatility.
The US labour market is still adding jobs albeit at a slower pace than in 2018, and the December performance showed moderation compared to the rather sharp improvement in quantitative terms revealed by the November release.
The Broad labour underutilisation ratio (U-6) fell by 0.2 points but remains high and the official unemployment is now hovering around levels not seen since the late 1960s
The worry is that the jobs being added represent a significant hollowing out of jobs in the median wage area (the so-called ‘middle-class’ jobs), which is reinforcing the polarisation in the income distribution and rising inequality.
Further, wages growth fell below the 3 per cent level for the first time since mid-2018 and real wages growth failed to match annual productivity growth.
Taken together, we can conclude that the US labour market is not yet at full employment despite the low unemployment rate.
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.