April 03, 2022
Many of us have highlighted both the strong pace of job growth and the drop in unemployment in March. This is great news. We are now looking at a labor market that is as strong as at any point in the last fifty years.
This should be cause for celebration, but all the Republicans have said they don’t give a damn about people getting jobs, the issue is inflation. And, most media commentators seem to agree. Hey, what difference does it make if someone can find a job, what about the price of gas?
I’m not sure how much gas people who don’t have jobs can buy, but in any case, there was some good news about inflation in this report as well. The scary story about inflation being pushed by inflation hawks like Larry Summers, is that we are facing a wage-price spiral.
In this story, we are not concerned about just a one-time increase in the inflation rate. The real problem is that the inflation rate will continue to increase unless the Fed raises interest rates enough to give us a severe recession. So, the choice is either an inflation rate that spirals ever upward or a stretch of high, maybe even double-digit, unemployment.
On this front, the March data did indeed have good news. First and most importantly, there is some evidence that wage growth is slowing.
The average hourly rose by 5.6 percent over the last year, but it increased at a just a 5.1 percent annual rate comparing last three months (Jan-Mar) with the prior three months (Oct-Dec). There is a similar story with the pay of production and non-supervisory workers. Their average hourly wage increased 6.7 percent year over year, but rose at just a 6.0 percent annual rate comparing last three months with the prior three months. Pay for production workers in leisure and hospitality, which had been soaring, slowed from a 14.9 percent year over year increase, to an 8.3 percent annual rate comparing last three months, with the prior three months.
The wage data are erratic, and the picture may look very different next month, but the evidence in the March report is that wage growth is slowing, not accelerating. That is not consistent with the wage-price spiral story we keep hearing.
Other data in the report also suggest some weakening of the labor market. The length of the average workweek fell by 0.1 hour in March. This left the index of aggregate hours unchanged, in spite of the 431,000 jobs created in the month. This is consistent with the labor shortage becoming less severe.
The length of the average workweek has been consistently higher than the pre-pandemic level over the last year. This is consistent with a story where employers, facing difficulty getting new workers, have their existing workforce put in more hours. The shortening of the workweek in the March data could indicate that employers are facing fewer difficulties in hiring.
The other item in this report suggesting some weakening of the labor market is the drop in the share of unemployment due to people who voluntarily quit their jobs. This percentage dropped from 15.1 percent in February to 13.0 percent. This is an important measure of labor market strength, since it indicates the extent to which workers are sufficiently confident of their labor market prospects that they are willing to quit a job before they have another job lined up.
As I always note, these monthly data are erratic, and April may tell a different story, but the March data are consistent with some weakening of the labor market. To be clear, a labor market where workers cannot count on pay increases and quit a job they dislike is not good news. But the concern that the labor market was too strong, and would lead to serious problems with inflation, was real. The March report suggests this is less likely to be the case.
I will also add two points that are often overlooked in the inflation discussion. There has been a big shift from wages to profits in the last two years. The profit share of national income has risen by 1.1 percentage points between 2019 and 2021. This is not consistent with the wage-price spiral story told by inflation hawks. If the profit share is increasing, then wages clearly are not driving higher prices.
The other point, is that productivity growth has actually sped up over the last three years, compared to the prior decade. It has average 2.3 percent annually from the fourth quarter of 2018 to the fourth quarter of 2021. It averaged less than 0.8 percent annually from the fourth quarter of 2010 to the fourth quarter of 2018.
This is the opposite of the story we saw with the 1970s inflation. In the 1970s, productivity growth slowed to just over 1.0 percent annually after rising at a 2.5 percent annual rate in the prior quarter century. Workers had long become accustomed to substantial real wage gains year by year. That was no longer possible in the 1970s, with productivity growth slowing to a crawl.
Anyhow, I continue to stress the shift to profits in the pandemic and the uptick in productivity growth as two important differences between the current situation and the 1970s. We’ll see how things play out in the quarters and years ahead, however the key point here is that the March jobs report not only had very good news on employment, it also had encouraging news on inflation. The latter point has gone mostly unnoticed.