How Much Slack In The Labor Force?

The chart below is probably the best depiction of the labor market because it includes hours worked, hourly pay growth, and the number of employed people.

Effectively, it is weekly earnings multiplied by the number of workers in the labor force. As you can see, this growth reading fell from 4.32% in January to 3.24% in February. This expansion’s peak was in February 2015 when it hit 5.04%. That’s also when year over year private payrolls growth peaked at 2.56%. It fell from 2.2% to 1.9% in February. As you can tell, this aggregate income proxy is still near the high end of where it has been this cycle even though the February labor report wasn’t good.

People Are Starting To Look For Jobs

Usually, when more people start looking for jobs, it’s a bad sign because it means the labor market has turned lower. However, the chart below shows the economy is at a unique point where there has been an increase in people looking for work while the percentage of people who got a job isn’t falling.

The chart looks at the 3 month rolling average of monthly flows from outside the labor market. The increase in people coming off the sidelines and looking for work provides supply for the labor market. While this cycle hasn’t seen wage growth lead to inflation, which would cause the Fed to raise rates, potentially causing a recession, it’s still good for there to be slack in the labor market because it allows firms to expand. With slack, hiring isn’t limited by population growth.

Not Much Slack Left?

There has been an unusual activity with the unemployment rate which needs to be explained. The unemployment rate increased 0.1% in January to 4% even though 311,000 jobs were created which is a blockbuster report. That’s because the sequential difference in the seasonally adjusted employment rate isn’t equal to the number of jobs created/lost. In January, the number of employed people fell from 156,945,000 to 156,694,000. In the February report, only 20,000 jobs were added, but the unemployment rate fell from 4% to 3.8%. That’s because the number of employed people increased sharply to 156,949,000

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