By Michael R. Strain / Bloomberg Opinion
The U.S. job market served up a shocker in April. Economists expected a million new jobs to be added. But the monthly jobs report released by the Labor Department Friday morning showed 266,000 net payroll gains.
In normal times, that number would be considered great news. In light of expectations about a rapid recovery from the covid-19 recession, it’s a big disappointment.
Normally, a disappointing jobs report reflects a reluctance among employers to hire more workers. But the demand side of the labor market looks strong. The problem is more likely on the supply side; job opportunities are out there but workers aren’t flocking to them. The plural of anecdotes is not data, but all the noise employers are making about their struggle to fill jobs may have more signal than many economists thought.
It’s always important not to read too much into any one month’s data. April could have been an odd month for many reasons, and it won’t be fully understood until data for May and June are available for context. Though the April data do increase my concern that the labor market is tighter than it appears — with monthly job gains rapidly slowing, perhaps due to supply constraints — I still think the job market is fundamentally weak, racked with damage from the covid-19 pandemic.
Resolving this mystery matters. If the labor market is tight, then the demand-side boom the economy will experience over the next several months could lead to substantial overheating and problematic inflation. This would erode real wage gains, and might suggest that the Federal Reserve needs to slow the economy relatively soon to ensure price stability.
On the other hand, if the job market actually is weak despite appearances to the contrary, then chances are higher that a nervous Fed will hike interest rates too early. That could end the recovery before low-wage workers could fully benefit from it.
Assessing the tightness of the labor market is difficult enough in normal times. But the pandemic has scrambled economic concepts and measurement. From my perspective, though, the single most important fact about the labor market is that lots of workers are still available. In a tight labor market, this wouldn’t be the case.
Let’s start with employers’ demand for workers. The rate of job openings is at a record high, suggesting that businesses want to hire. In addition, last month there were 1.3 unemployed workers for every job opening. For context, following the 2008 financial crisis, this measure peaked at 6.5 unemployed workers per vacancy, and in the slack labor market of that slow recovery it didn’t fall below two until 2014. The rate at which workers quit their jobs is now slightly higher than it was prior to the pandemic, as well, suggesting that workers have confidence that they can find a better opportunity in the job market than the one they have.
The most convincing argument that the labor market is tight is that employers are feeling the need to raise wages to attract and retain workers. According to a measure of wage growth maintained by the Federal Reserve Bank of Atlanta, median annual wage growth for continuing workers was about the same in March 2021 (3.7 percent) as it was in February 2020 (3.9 percent), the month prior to the Covid-19 recession.
Wages are growing across the economy more broadly, as well. Prior to the pandemic, average wages were growing at a 3 percent annual rate. Relative to March, they grew at a 8.7 percent annual rate in April.
In normal times, these statistics would make a compelling case that the job market is hot. Indeed, in late 2019 and early 2020, I was relying on them to do exactly that, trying to make the case that the U.S. was at or close to full employment.
But the U.S. economy is not in normal times. Concepts like “tightness” make more sense when economic change is gradual. Today’s economy is experiencing rapid shifts that make it harder for the array of available data and statistics to tell a consistent story.
Take wages. Normally, wage increases suggest a more competitive job market. But wages soared on paper last spring because lower-wage workers were the first to lose their jobs, artificially boosting average wages.
Or take that hopeful-looking rate at which workers are quitting their jobs. If some workers are quitting because their children are stuck in schools and day care centers that have yet to reopen, then the statistic isn’t telling the story it normally tells.
The single most important statistic is something we can call the “pandemic jobs gap.” Factoring in the April data, my calculations suggest that the U.S. is currently 10.8 million jobs below its pre-pandemic trend. That suggests a job market with a long way to go to full health, and is a more persuasive statistic than the ones that point to a tight job market with employers scrambling to find available workers.
Another sign of economic weakness is the absence of improvement in workforce participation. In April, the labor-force participation rate was 61.7 percent, basically the same as it was in June.
Still, Friday’s numbers add to the case that the demand side of the labor market is in much better shape than the supply side. The excessively generous unemployment benefits that are in place until September will keep workers on the sidelines, restricting employment gains and keeping wages artificially high. The longer schools and day-care centers are closed, the harder it will be for women with children to go back to work.
Supply-chain issues are holding the job market back, as well. In April, the motor vehicles sector lost 27,000 jobs, perhaps due to shortages of computer chips needed to make cars. The transportation and warehousing sector lost 74,100 jobs, due in part to challenges with shipping.
If the virus had disappeared last spring after just a few weeks, then I would have expected the pandemic jobs gap to completely close, and the workforce participation rate to fully recover to its pre-pandemic level. But after a year of social distancing, it is harder to know what to expect. Over a period so long, people’s preferences, goals and decisions can change. Some of those labor-force exits may be permanent.
If so, then the job market is hotter than the workforce participation rate suggests. Even if that’s the case, it’s implausible that the labor market does not have a long way to go to full recovery.
Over the next few months, expect more conflicting signals about the underlying health of the labor market. In fact, expect the degree of conflict to intensify. The mystery of the April data will be resolved with time and additional analysis, but the overall state of the labor market will remain hard to assess.
If workers are slow to come back this summer even as the demand side of the economy is booming, then the Fed will find itself in a difficult position. The fundamentals of the labor market would remain weak. But the experience of employers, along with rising wages, would lay a veneer of tightness atop a weak foundation.
What should the Fed do? Maintain confidence that imbalances between supply and demand will resolve, particularly after the unemployment benefits supplement expires in September and schools reopen in the fall. Remain optimistic about employment gains in 2021. Batten down the hatches and ride out the storm.
Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”