May 03, 2023
As in past months, attention will focus on whether the slowdown in wage growth seems to be continuing. The monthly wage data are erratic, and as happened several times in the last year, can be substantially revised so that they tell a different story a month or two after they were initially reported.
But we always have to make our judgments, and the Fed has to make its interest rate calls based on the data we have; and that data have been showing a marked slowing of wage growth over the last year.
Average Hourly Wages and the Employment Cost Index
The annualized rate of growth in average hourly earnings (AHE) from December to March was just 3.2 percent. This is down from a peak of 6.4 percent annual rate in the three months from October 2021 to January 2022. The Employment Cost Index (ECI) also shows substantially slower growth in the most recent data, rising at an annual rate of 4.7 percent in the first quarter, down from a peak of 6.3 percent between the first and second quarter of 2022.
While the two indexes usually are fairly close, there are definitional differences. The ECI includes all compensation, not just wages. The AHE is just private sector workers, whereas the ECI also includes government employees. If we just look at the ECI for wages in the private sector, the annualized rate in the first quarter was 5.2 percent.
The Relative Merits of the AHE and ECI as Measures of Trends in Inflation
Many economists see the ECI as a better gauge of wage inflation, since it holds the composition of the workforce fixed. This was clearly true at the start of the pandemic, when massive layoffs of low-paid workers inflated the growth rate of the AHE, and then depressed it in the second half of 2020 and 2021, when these workers were rehired.
However, it is less clear that a wage measure that keeps composition fixed is generally more desirable as a gauge of wage inflation. In the years from 2006, when the current AHE series starts, to the last quarter before the pandemic, the AHE increased by an average of 0.2 percentage points more annually than the wage component of the ECI for private sector workers. This presumably reflected a movement into higher paying occupations and industries.
It is not clear if we are seeing the opposite story now, but it is at least plausible. If we have a trend, where we see a loss of high-paying tech jobs, and growth in relatively low-paying jobs in restaurants and other sectors, we would want a wage measure that picks this up. It is worth noting that our productivity data would reflect this shift, so if it is large enough to have a substantial economic impact it would imply lower productivity growth to go along with the slower wage growth.
Hours and Jobs
As always, there will be much attention paid to the jobs number reported for April. However, it is important to also note trends in hours. In recent months, we have seen some shortening in the average workweek. As a result, the index of aggregate hours actually fell in March. It is up by just 0.4 percent since October. The growth in demand for labor would be the equivalent of just 530,000 private sector jobs, or less than 110,000 a month, if there had been no decline in the average workweek. This would be a sustainable pace of job growth, even with an economy at full employment.
Job growth has been far more rapid over this period, with the private sector adding 1,270,000 jobs, an average of more than 250,000 a month. It is important to keep an eye on both jobs and hours; if employers are adding workers, but also cutting back hours, it means that the demand for labor is not growing as rapidly as the jobs numbers indicate.
Employment and Unemployment
Last year we had a major gap between job growth in the establishment survey and employment growth in the household survey. This was partly closed with the population adjustments included with the January data, but the gap is still unusually large.
In the last two months, we have been seeing extraordinary employment growth in the household survey, which shows the number of employed increasing by 750,000 since February. The employment to population ratio and labor force participation rate both hit new highs for the recovery. For most demographic groups, these measures are at, or above, their pre-pandemic high.
The household data are always erratic on a monthly basis. However, it will be important to see whether we have a similarly strong picture in April and the unemployment rate stays at 3.5 percent.
Record Low Black Unemployment
The unemployment rate for Black workers hit a record low 5.0 percent in March, with the unemployment rate for Black women falling to 4.2 percent – also a record low. These data are erratic, so a modest uptick could just be measurement error, but a large jump would mean either a serious deterioration in the labor market for Black workers or that the March data were a fluke.
Share of Unemployment Due to Voluntary Quits
The share of unemployment due to job-leavers is a good measure of workers’ confidence in the strength of the labor market. It means that workers were prepared to leave a job before they had another job lined up.
The share of unemployment due to quits fell to 14.2 percent in March. This is well below the 15.8 percent peak we saw in September, and lower than peak levels we saw before the pandemic, although it still indicates a strong labor market.
Jobs and Hours in Construction and Manufacturing
These are highly cyclical sectors that would be hit hard in a typical recession. In spite of the Fed’s rapid string of interest rate hikes, construction has continued to add jobs over the last year, although we did see a modest drop in residential construction in March.
Manufacturing lost 1,000 jobs in each of the last two months. While this drop is trivial, the 0.5 percent drop in hours since January is somewhat more concerning. Aggregate hours are also down for construction. But in both cases, the January figure showed an extraordinary jump from December, so hours in both sectors are still above the fall levels.
Evidence of a Soft Landing or Early Signs of Recession
The March labor report was very positive in almost every area. The economy was and is slowing, which it had to do to keep inflation contained. The big question is whether the slowdown turns into a recession, costing millions of workers their jobs. So far, the evidence on this front has been very positive, but the April jobs report will be another big piece of the puzzle.