The January Jobs Report: Too Early to Pop the Champagne?
The jobs report for January has been released by the Bureau of Labor Statistics and the labor market continues to reflect the ongoing economic boom as we begin 2018. Unemployment rate held steady at 4.1% while 200,000 jobs were added to the economy. Another important statistic showed a historic rise - wage growth accelerated to its fastest year on year pace since June 2009.
This is good news and lends credence to the narrative of the US economy operating at full employment where workers are scarce and employers needing to expand their production have to pay higher wages to bid workers away from their current jobs or to retain them so they do not take up employment elsewhere. There is however reason for tempered excitement, as there are two perhaps other important numbers to look closely at. The labor force participation rate, and another number not out in today’s release but which is related to the wage growth observed - the change in the Consumer Price Index (CPI). The labor force participation rate has generally been on the decline since the height of the last recession - the Great Recession - in 2008, from 66.2% to currently 62.7%. This number remained unchanged from last quarter and represents a 0.1% drop from a year ago. The importance of the the labor force participation rate lies in the fact that the unemployment rate is constructed from a base defined as the labor force, and which includes only those who have jobs and those who while not having jobs remain actively searching for one.
The labor force participation rate therefore measures how large that base is in correspondence to the adult working age population - all who could potentially work. So a lower rate means a voluntary choice by some of these adults to quit the labor force. The upshot is that there is reason for cautious cheer in the numbers because while unemployment remains at the same low rate, the lower than historic trend labor force participation rate means that there are some people who are not considered as unemployed, don’t have jobs, would like one, but they have given up searching for one.
This is not just a problem of inefficient resource allocation, but also of a potentially large dependency ratio which means that socially provided goods and services become costlier to those who work, who in effect subsidize their provision to these other members of the population. The change in the CPI is the official measure of inflation, how prices on average are increasing over time. Economists warn that people should be careful in their reaction to nominal changes, like wage increases, until they know what has also happened to prices.
Ultimately the rational consumer should make decisions based on real or quantity variables - in this case the real wage - which is the purchasing power of one’s wage, i.e. how much of a good or bundle of goods that a given dollar or monetary income can purchase. Intuitively, when businesses are forced to raise wages in order to obtain or retain workers, they may try to pass on these costs through higher prices on the goods they produce and sell. This therefore results in inflation and an eroding of the nominal (dollar) wage increase that workers obtained.
In other words strong nominal wage growth should be cheered only if it leads to strong real wage growth. The CPI information for January will be released within the next couple weeks, however in terms of annual averages, the CPI showed an increase of 2.1% for 2017, and in historical context, there was an increase of 1.3% and 0.1% for 2016 and 2015 respectively. The year-on-year change in the CPI for December of 2017 was an increase of 2.1%.
So with nominal wage having grown by 2.9% in January from a year ago, we still have very weak real wage growth, which may fall if we see a faster rate of price growth for January when the US Bureau of Labor Statistics releases the CPI information for January.