Labor slack’s vanishing act signals wage gains coming soon
April’s employment report contained an even bigger surprise than the jump in U.S. payrolls: Spare capacity in the labor market is quickly disappearing, signaling that lackluster wage growth should get a spark in coming months.
The unemployment rate unexpectedly dropped to 4.4 percent, the lowest since May 2007, Labor Department data showed Friday. The underemployment rate, which includes discouraged workers and those who are working part-time but would prefer full-time positions, declined to the lowest since November 2007, one month before the last recession started.
Such figures help explain why economists were looking beyond the subdued 2.5 percent year-over-year wage gain, the smallest since August. Removed from the weather-related distortions of the previous three months, the April figures indicate solid trends in employment, while measures of those left behind in the recovery – favored by Federal Reserve Chair Janet Yellen and President Donald Trump alike – are at or near pre-recession levels.
While the tighter labor market failed to translate to a breakout in wages in April, analysts are penciling in bigger paychecks in the months to come.
“Labor-market slack is getting absorbed pretty quickly,” said Stephen Stanley, chief economist at Amherst Pierpont Securities. “As long as the labor market is tightening as it has been recently, it’s a very safe bet that we’re going to see wages accelerate.”
Economists had instead been calling for the jobless rate to rise in April to 4.6 percent and for hourly earnings to increase at a 2.7 percent pace from the previous 12 months. The actual results imply that the labor market is even tighter than they thought, while employers may be feeling less pressure to dole out raises.
Underneath the headlines, fewer Americans are registering as dissatisfied with their prospects or employment situation. People working part-time who would prefer full-time employment, also known as part-time for economic reasons, fell to 5.27 million, a nine-year low. Discouraged workers, who aren’t looking for work because they believe no jobs are available, are near the lowest since 2008.
But other signs, too, have been pointing to a pickup – the employment cost index rose in the first quarter at the fastest pace since December 2007. Business anecdotes also have added fuel to the argument that the scarcity of available workers for a high level of job openings will force employers to bid up wages in order to retain or attract talent.
The Fed’s Beige Book report last month was packed with these stories, including difficulty hiring in Boston with applicants failing math and drug tests, and a recruiter from Virginia advising clients to increase pay and get employees on board quickly due to labor shortages. One builder in South Carolina got out of the construction business after 25 years amid a scarcity of skilled workers.
Fed policymakers are counting on wage growth to pick up, saying in their post-meeting statement Wednesday that last quarter’s expansion – the weakest in three years – was a temporary blip as the broader economy still presents a solid demand outlook. That signaled central bankers were still on pace for a couple more interest-rate increases in 2017.
Yellen can take heart that the bigger picture for the labor market, too, shows progress is evening out. A dashboard of 12 of her favorite jobs and wages indicators gained one more metric flashing green this month, with the underemployment rate dipping below the average in the four years leading to the last downturn. Six of 12 have returned to this threshold.
“Pretty much all of the various indicators of labor-market slack improved and have been improving,” Stanley said.
Earnings have struggled to gain traction throughout the almost eight-year expansion, as businesses complain of weak pricing power and productivity gains remain tepid. But the importance of the falling unemployment rate outweighs any disappointment from the reading on average hourly earnings, according to Citigroup Inc.’s Andrew Hollenhorst and Andrew Labelle.
“The unambiguous answer is that lower unemployment – which should ultimately drive wage pressure – is the more important takeaway,” they wrote in a research note after the report.