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Wage Growth Strong, as Unemployment Edges Lower in December

January 6, 2006 (Jobs Byte)
Jobs Byte

Wage Growth Strong, as Unemployment Edges Lower in December

January 6, 2006
By Dean Baker

The drop in construction jobs was the biggest since February of 2003.

The economy added 108,000 jobs in December according to the Labor Department's establishment survey. While this is considerably less than generally expected, November's job growth was revised up by 90,000 to show a gain of 305,000 jobs. The two month average growth of 207,000 jobs is a healthy pace of job growth and probably better reflects the current state of the labor market.

The data in the household survey is also consistent with a strengthening labor market. The unemployment rate edged down to 4.9 percent, bringing the average for the second half of 2005 to 5.0 percent. The number of people involuntarily working part-time fell for the fourth consecutive month. The share of long-term unemployment continued to decline, and the average duration of unemployment spells fell by 0.3 weeks, while the median duration stayed constant near its low-point for the recovery. On the other side, the employment to population ratio is still 1.7 percentage points below its 2000 average, the equivalent of 4 million fewer people holding jobs.

Blacks were the only demographic group to show a major change in unemployment. A 1.5 percentage point increase reported in November was almost completely reversed as the unemployment rate for blacks fell by 1.3 percentage points. The unemployment rate for black teens showed a remarkable 14.0 percentage point drop, more than reversing a 6.0 percentage point increase reported for November. Clearly the November numbers were simply a fluke, although the December data may be reflecting a real improvement in the employment prospects for black teens. The over 55 age group continues to get a disproportionate share of the new jobs. They accounted for 48.9 percent of the growth in employment in the household survey over the year.

The two most obvious sources of weakness in the December establishment data were the construction and retail sectors. The construction sector showed a loss of 9,000 jobs, its first decline since February of 2004. This sector had been adding more than 20,000 jobs a month. While this could just be an anomaly, it may be an indicator of a weakening in the housing market, which is showing up in other data, such as declining sales of new and existing homes. The transportation sector lost 10,300 jobs in December.
The retail sector showed a loss of 15,600 jobs. This is most likely due to changed patterns of seasonal hiring, with firms adding fewer workers than normal for the holiday shopping season. This would mean that retail employment can be expected to grow more rapidly than normal over the next two months.

On the other side, manufacturing added 18,000 jobs (21,000 production jobs), the third consecutive month of growth. The temporary help sector added 9,000 jobs, after an upward revision put November job growth at 16,000. The restaurant sector added 36,000 jobs following an upwardly revised figure of 46,000 jobs in November.

The tightening of the labor market is sustaining more rapid wage growth. Over the last three months, wages have risen at a 3.4 percent annual rate. This compares to just a 2.7 percent annual rate in the first half of 2005. While prices far outpaced inflation over the last year because of rising energy prices, with the recent decline in energy prices, real wages are now rising at a healthy pace.

With the labor market finally tight enough to allow for real wage growth and the economy generating jobs at a healthy pace, the conditions are finally in place for sustainable growth. However, the flip side is that the housing market appears to already be weakening. In addition, higher wage growth will almost certainly lead to more inflationary pressure. These pressures will be intensified to the extent that a falling dollar leads to higher import prices. If long-term interest rates rise, then the housing market will weaken further, and this could far more than offset the boost from healthy wage growth.

Dean Baker  is Co-Director of the Center for Economic and Policy Research in Washington, D.C.

CEPR’s Jobs Byte is published each month upon release of the Bureau of Labor Statistics’ employment report.

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