The data from the March labor market show continued labor market strength. As was true last month, almost all employment-based indicators show improvement from the previous month, even as the general trend of wage growth is downwards.
The headline unemployment number fell from 3.6% to 3.5% (as we previewed earlier this week) as employment continued its steady march upwards. Both the all-ages and prime-age employment rate have been steadily increasing since November 2022, with the prime-age employment rate at 80.7%, now exceeding its as-reported pre-pandemic peak three years ago. The full-time prime-age employment rate continued to rise to 72.3%, from 71.8% the previous month. The black-white unemployment gap fell to 1.8%—its lowest-ever reported level. The establishment survey showed 236,000 jobs added in March, its lowest increase since 2021.
In November, Powell said “We’re getting really nothing in labor supply now.” Three months later, prime-age labor force participation increased 0.8 percentage points. This rate of increase hasn’t been seen in over fifty years. Powell may have been wrong about labor supply, but the Fed should take comfort in the fact that they are getting some help in labor supply without (yet) increasing unemployment.
As has been true for months, wage growth continues to decline, although the trajectory is bumpy. We will get Employment Cost Index data at the end of this month, and the last 3 months of wage readings points towards a sub-4.0% ECI print. Our replication of the White House’s Core Non-Housing Services Average Hourly Earnings index, a new addition to the dashboard this month, showed a 3.3% annualized monthly growth rate in February (the source data for this series is released with a one-month lag).
The lesson of the nuances of employment, non-employment and participation in this report is that the Fed needs to expand its thinking of the labor market beyond the unemployment rate or the vacancy-to-unemployment ratio. Increasing participation (perhaps from the high wages themselves) is one path to “rebalancing” the labor market that does not run through unemployment.
Labor Market Dashboard: March 2023
A Full Recovery
No matter how you cut it, the employment numbers from this month are strong. Prime-age employment for both men and women increased, and prime-age labor force participation is at its pre-pandemic peak.
Since November 2022, employment has been on a steady upwards trend. Importantly, this increase has happened even as the unemployment rate has been bouncing around between 3.4% and 3.7% since March 2022—the increase is mostly due to an increase in labor force participation. While the Fed has been worried about stagnant labor supply leading to a tight labor market, they have neglected the opposite chain of causality: running the labor market hot is one way to boost labor force participation.
One way to see this is in labor market flows. Over the past few months, the most significant changes have been an increase in the rate of non-employed workers finding employment and a decrease in the rate of unemployed workers leaving the labor force.
Going beyond the headline numbers, the employment situation still appears strong.
In December’s labor market recap, I flagged the fall in full-time employment as one potential sign of weakness in the labor market. Since then, the decline in full-time employment in 2022 has been fully reversed, and full-time employment is now above its 2019 level for the first time since the pandemic.
Prime-age full-time employment continues to impress, and is now at 72.0%—its highest level since the Great Recession.
Finally, the black-white unemployment rate gap fell sharply from 2.5% to 1.8%. This is its lowest level ever recorded. A tight labor market is generally beneficial for workers, but especially so for the least advantaged groups.
Wage deceleration continues
Wage growth took a big step back in 2023 Q1. The last three months of the annualized monthly growth rate of average hourly earnings were 3.7%, 2.6%, and 3.3%. This trend portends another slowdown in the Employment Cost Index print later this month, and it is hard to argue that this level of growth rate is inconsistent with low inflation.
Other data confirm this trend. Every data series is different, but the general trend is towards a bumpy downwards trajectory in the growth rate of wages. The only outlier right now is the Atlanta Fed Median Wage index, which is a lagging indicator.
New to our wages graph this month is our reconstruction of the White House’s core non-housing services wage index. This series is essentially a reweighting of the industry-level average hourly earnings data, where the weights are constructed using input-output tables that measure industry employment input into final consumption categories. The 3-month growth rate in the 3-month average of this series was 4.5% in February, and should slow in March given the slowdown in broader average hourly earnings. Anyone who is worried about wages driving services prices should draw some relief from this.
Strong but Slowing, as always.
As we have been saying for months, disinflation is possible even amid labor market strength. One fantastic way of visualizing this is the wage-inflation vs. unemployment “Phillips Curve.”
Remarkably, the slowdown in wage growth has occurred even as unemployment fell. Given this phenomenon, it is odd that FOMC members have been so persistent in aiming for an increase in unemployment. This is a goldilocks labor market, with strong employment, increasing labor supply, and sustainable levels of wage growth. Why end it?