U.S. Economic Report || Expanded Labor Market Dashboard: Extremely tight labor markets and wage pressures

Expanded Labor Market Dashboard: Extremely tight labor markets and wage pressures

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*This report updates our enhanced labor market dashboard that builds upon the dashboard of 12 indicators originally developed by former Federal Reserve Chair Janet Yellen and includes data that reflects the objectives of the Fed’s new mandate of maximum inclusive employment (“An expanded labor market dashboard for assessing progress toward the Fed’s maximum inclusive employment objective”, July 15, 2021).

In Summary:

*Labor markets are extremely tight, with strong demand and labor shortages. In testimony before Congress last week, Fed Chair Powell acknowledged this assessment and said that the economy is either at or above full employment. The Fed never expected that inflation would rise significantly above its 2% average inflation target before its maximum employment mandate had been reached, but that is what has happened.

*In recent months, in the Establishment Survey, payrolls have continued to rise rapidly—an average monthly gain of 600k in the last five months-- and have recovered 90.4% of the 22 million pandemic declines in March-April 2020. Of the 2.1 million payroll employment shortfall, 1.5 million are in leisure and hospitality, and 0.3 million are in public education services. Payrolls in many other sectors have fully recovered and are now well above pre-pandemic levels.

*In the Household Survey, employment has also risen rapidly, recovering 95.5% of its 25.5 million pandemic decline, while unemployment has plummeted since 2021, and is now close to its pre-pandemic low. The recovery in the labor force participation rate has been slower, retracing only 65.6% of its pandemic decline. Consequently, the unemployment rate has fallen to 3.8%, near the lowest rate in five decades and below the Fed’s estimates of the longer-run natural rate of unemployment, so-called “full employment”. The employment-to-population ratio has recovered 86.9% of its decline.

*Inclusive labor market data indicates vast improvement for all groups. U-6, the broadest measure of unemployment, has fallen to 7.2%, a near complete recovery that puts it close to all-time lows. The unemployment rate of black people has fallen dramatically, and is close to an all-time low, narrowing the gap with white people, while the unemployment rate of Hispanic people is now at its pre-pandemic level.

*JOLTS data indicates that job openings, new hires, quit rates, and the number of job seekers per job opening are all at or near record highs, highlighting labor market dynamism, the mobility of labor, and the difficulty of businesses to retain workers. The NFIB survey of small businesses identifies difficulty finding skilled labor as business owners’ second largest problem behind inflation.

*Average hourly earnings (AHE) have accelerated but they have not kept pace with inflation, so real wages are declining. AHE of private sector production and nonsupervisory workers rose a modest 0.3% in February, resulting in a 6.6% yr/yr rise. Wages are expected to accelerate further with tight labor markets, rising labor productivity, and accelerating inflation and inflationary expectations (“OER, Services Prices, and Inflation” , January 18, 2022).

Mickey Levy, mickey.levy@berenberg-us.com

Mahmoud Abu Ghzalah, mahmoud.abughzalah@berenberg-us.com

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