Last week, the December jobs report showed that nonfarm payrolls grew by 252,000 as the unemployment rate fell to 5.6% in the final month of 2014.
But the report did contain a disappointment when you looked at wages, as average hourly wages fell 0.2% in December from the prior month, a big miss from expectations for a 0.2% increase.
Some viewed this as signaling weakness or slack in the labour market that wasn’t obvious from the big headline payroll gains, but in a note on Tuesday, Goldman Sachs economist Kris Dawsey walked through a few reasons why the drop unexpected drop in wages might not be so terrible after all.
Dawsey writes that among other things, a quirk in the calendar may have dented wages more than would have otherwise been the case.
“In months when the Saturday of the reference week falls on the 13th of the month, as was this case in December, the gain in average hourly earnings tends to be particularly weak. In January, the reference week ends on Saturday
the 17th, which suggests a somewhat stronger print. While these two distortions initially appear to be completely distinct from one another, due to the quirks of the Gregorian calendar months with reference weeks ending on the 12th or 13th are more likely to coincide with months containing a higher number of working days relative to the prior month. Similarly, months with reference weeks ending on the 15th or 16th — which tend to see stronger earnings growth — are more likely to contain a lower or equal number of working days relative to the prior month. As a result, the two apparently distinct negative calendar effects identified by observers may at least in part be capturing the same underlying phenomenon.”‘
So not only did December’s reference week — you can read more about the jobs report’s reference week here — fall in a weak pattern during December, but January’s reference week is expected to be on the strong side.
Dawsey’s argument on why the drop in wages might not be as worrying doesn’t all hinge on the calendar, however.
Since 1990, 25 months have seen wages fall month-on-month in the initial jobs report, and 22 of these times these prints have been revised higher.
Additionally, wages in the retail sector were unusually weak, falling 1.2% in December which Dawsey notes was a five standard deviation move and the worst drop ever seen in the sector by a “considerable margin.”
“Taken together with the strong retail employment gain in November and unusually subdued gain in December, we think changes in the timing and character of holiday retail hiring could potentially be resulting in seasonal adjustment distortions in the sector, and as a result would not read much into last month’s drop in earnings,” Dawsey writes.
Dawsey also notes that Goldman’s wage leading indicator has ticked higher in recent months, potentially pointing to higher wages in future months.