August 04, 2023
The establishment survey showed a gain of 187,000 jobs in July, slightly less than was generally expected. The prior two months’ gains were revised down by 49,000, bringing the average gain over the last three months to 218,000. The unemployment rate edged down to 3.5 percent, putting just 0.1 percentage point above the half-century low hit in April.
Wage Growth Picks Up, Strongest Gains at the Bottom
The pace of wage growth accelerated somewhat in the July report, with the annual rate of growth in the average hourly wage rising to 4.9 percent over the last three months. It had been under 4.0 percent earlier this year. This is the opposite direction that we have seen in the Employment Cost Index (ECI), where the rate of wage growth slowed to just 4.1 percent in the first quarter.
The Average Hourly Earnings series is a considerably larger sample, with a much higher response rate. The ECI does hold composition fixed, but it is unlikely that explains much of the difference. It is worth noting that the average hourly compensation series in the productivity data grew at just a 2.1 percent annual rate in the second quarter, down from a 3.7 percent rate over the last year.
It seems we are still seeing the largest wage gains for the lowest paid workers. The average hourly wage for production and non-supervisory workers in the leisure and hospitality sector rose at a 7.3 percent annual rate over the last three months.
Hours Fall in July, Back at January Levels
While we have seen strong growth in employment this year, it has been offset by a decline in the length of the average workweek. The length of the average workweek fell by 0.1 hour in July, to 34.3 hours, leading to a drop of 0.2 percent in the index of aggregate weekly hours, putting it back at January’s level.
This is a great story from the standpoint of productivity, since it means we are seeing strong growth in output even while hours are not increasing, with the important qualification that the hours measure is erratic and subject to large revisions. But, it is also important to ask why the length of the average workweek is declining.
Part of the story seems to be that the January data was an anomaly, as some of us speculated at the time. Looking at the better measured production and non-supervisory category (roughly 80 percent of all workers), the length of the workweek jumped by 0.3 hours from December to January, however the 33.8 hour average workweek is still down by 0.2 hours from the year ago level.
The average workweek is down by 0.5 hours in manufacturing from July 2022, which could be a labor hoarding story, as employers would rather cut back hours than lay off workers in response to reduced demand. It is also down by 0.5 hours in leisure and hospitality, which translates into a 2.0 percent drop since the average workweek had been 24.6 hours, compared to 41.1 hours in manufacturing. There also may be a story of labor hoarding here, reflecting the difficulty that employers had finding workers earlier in the recovery. In any case, it seems clear that the demand for labor is increasing less than the jobs numbers indicate.
Black Unemployment Edged Down to 5.8 percent
The Black unemployment rate hit a record low of 4.7 percent in April, and then rose sharply over the next two months to 6.0 percent in June. It reversed some of this rise, but at 5.8 percent it is still more than a full percentage point above its April low. The Black teen unemployment rate has risen sharply over this period from 12.9 percent in April to 20.7 percent in July.
Percentage of Unemployment Due to Quits Rises Again, but Still Below Pre-Pandemic Peaks
The share of unemployment due to voluntary quits rose to 14.6 percent, a second consecutive monthly rise. This is a high level, indicating workers are confident enough to quit a job without having a new job lined up already, but it is below the peaks hit last year and also below pre-pandemic peaks.
Unemployment for Workers with High School Degrees Falls 0.5 PP, Ties Record Low
Workers with less education were big gainers in the July data. The unemployment rate for workers without high school degrees fell by 0.8 pp to 5.2 percent. For workers with just a high school education it fell by 0.5 pp to 3.4 percent, tying the record low hit in April of 2019.
Health Care Dominates Job Growth in July, Government Job Growth Slows
The category of health care and social assistance added 87.1k jobs in July, accounting for more than half of all private sector job growth for the month. Health care alone accounted for 63.0k jobs. After adding 57,000 jobs in June, the government sector added just 15,000 in July. The biggest factor in this slowing was a drop in employment of 19,700 in state government education. This is likely a seasonal adjustment issue, as the timing of school opening and summer employment is changing.
There was also a slowing in job growth in the accommodation and food service sector, which added just 15,200 jobs in July following an even weaker 4,200 gain in June. This is consistent with the drop in the length of the average workweek noted above. This sector had been a big job gainer earlier this year.
Generally Good Report, but Slowing Could Go Too Far
Apart from the pickup in wage growth, this is probably a dream report from the standpoint of the Fed. They are seeing the slower job growth they were looking for. The current rate pace of job growth is likely in keeping with what they would see as sustainable, or close enough to it not to worry.
The fall in hours does raise the possibility that we will see layoffs and further slowing in the months ahead. This seems especially likely in the leisure and hospitality sector and manufacturing, where surveys show falling demand. If the Fed continues to hike rates the rest of the year, we may see a noticeable weakening of the labor market.