Despite what appears to be a healthy pace of job creation in the US, questions remain about the health of the labour market as the labour force participation rate remains low and wage growth remains tepid.
High Frequency Economics’ Jim O’Sullivan believes the underlying job market is much stronger than what most people give it credit for.
In a new research note to clients, he relates job growth to the growth of the potential labour force.
…After adjusting for breaks in the data relating to new population assumptions, the labour force is up 0.9% in the past 12 months. The unadjusted series is up 1.1%. Payrolls are up 2.3% in the past 12 months – 260k per month.
A 2%-plus pace for employment is far from booming by past standards, but it is exceptionally strong after allowing for demographic trends. The CBO’s estimated potential labour force series, used for potential growth calculations, rose just 0.5% in 2014. Gains in that series averaged 1.3% in the 1990s, 1.6% in the 1980s and 2.8% in the 1970s. The roughly four-to-one between payrolls growth and potential labour force growth in 2014 was stronger than in any year since the 1950s! Nor is there any sign of payrolls gains slowing in either jobless claims or employment-based tax receipts. Even Fed officials themselves do not appear to appreciate how extraordinarily accommodative monetary policy has become.
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An economy that’s creating more jobs than there are people coming into the labour force means that there may be more better opportunities for those who already have jobs.
Just last week, Wal-Mart may have proved this by announcing an unprecedented pay raise for 500,000 employees.
“I think it’s important to remember that we react one store at a time to whatever wage rates we need to attract and retain the talent that is required to run our business,” CEO Doug McMillon said. “We have higher wage rates to make sure that we’re competitive in the marketplace, and of course we’ll continue to do that.”