June Jobs Report Delivers Good Information and Huge Questions for Washington

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Employers are hiring and wages are rising, but the number of people actively working or looking for a job is stagnating, a phenomenon that has made it difficult for the Federal Reserve and the White House to determine how much the labor market has recovered and how long the US economy will continue to need strong support.

Employers added 850,000 workers to the payroll in June, a strong number supported by rising wages as employers scramble to recruit new employees to meet rising customer demand. The report gives encouragement to the Biden administration and a sign to the Fed that the economy is making progress towards the central bank’s full employment target.

But the fact that workers are not pushing back into the labor market makes the otherwise sunny outlook cautious. The labor force participation rate, a measure of those in employment or job seekers, has barely moved in the last few months and was unchanged in June at 61.6 percent. It remains significantly behind from 63.3 percent before the outbreak of the crisis.

With displaced workers lingering on the fringes of the labor market more than a year after the pandemic started – and months after the economy reopened – policy makers may need more time to assess how much room the labor market has to expand and how long it will take.

If many former employees have given up job hunting because of their retirement or shortly before, it could mean that the labor market is tightening long before employment returns to its previous peak. But if these workers are still planning to return to work once schools are fully open again and more people have been vaccinated – which most economists believe is more likely – it means there is still a significant cure to come.

This could be important to policy decisions by the Fed, which cut rates to near zero and launched a massive bond buying campaign to keep the economy going. If the labor market has to absorb a lot of the workforce later in the year as people look for work later this year, central bankers may want to keep their policies in place longer to stimulate demand and pave the way for a faster recovery.

“You will likely look at the headline, which is good, but then ask, ‘How much headroom is there?'” Said Priya Misra, director of global rate strategy at TD Securities. “And that depends on the participation.”

The poor performance in terms of the overall participation rate hides a certain strength in the underlying details. Employers in their prime, defined in the report as 25 to 54, were working or looking in greater numbers in June. The weakness came when teenagers were working or looking less and people over 55 saw no change. And the labor force participation of black workers skyrocketed – surpassing the labor force participation rate of white people for only the second time. That was the last time in 1972.

The fact that employment is recovering more strongly for a demographic that is often disadvantaged in the labor market, coupled with rising wages, supports the White House view that President Biden’s policies and the healing economy give people more power over it give economic fate.

“Today’s job news gave us something else to celebrate,” Biden said during his remarks at the White House after the data was released.

“This type of market competition not only gives workers more opportunities to earn higher wages,” he said. “It gives them the power to demand that they be treated with dignity and respect in the workplace. More jobs, better wages. That’s a good combination. “

The job numbers were also a welcome respite for a government that has been surprised and criticized by weak job growth in recent months. Job gains lagged behind analyst expectations in May and April, leading to criticism from Republicans who said the $ 1.9 trillion economic aid bill, signed by the president in March, is holding back the recovery – by putting it Additional unemployment benefits extended until September, which some companies blame for hiring difficulties – and rapid inflation.

Updated

July 2, 2021, 3:38 p.m. ET

On Thursday, Republicans on the Ways and Means Committee mocked Mr Biden in advance in a press release entitled, “After two disappointing job reports, President Biden’s June report is crucial.”

The details of the report supported the idea that workers would have more bargaining power. The average hourly wage rose 0.3 percent between May and June, in line with the expectations of economists in a Bloomberg survey. After two even stronger months, the rise signaled that companies were paying for the new hires.

Some sectors affected by the reopening performed particularly well: non-manager recreational and hospitality workers saw wages rise sharply by 2.3 percent between May and June. These data confirm other evidence that workers have the upper hand in the reopening economy. The Conference Board’s index of “many” jobs has increased over the past few months, people are quitting more often, and people are reporting looking for higher wages before taking a job.

However, the combination of falling labor force participation and competing employers could cause problems for the Fed if it continues. Central bankers and most mainstream economists expect workers to return to the labor market when extended benefits wear off, households spend their savings, the summer holidays fall, and schools reopen fully. This influx of workers is likely to dampen wage pressures.

Goldman Sachs economists in a recent research note estimated that labor force participation will rebound to 62.6 percent by the end of 2022. That would still be 0.8 percentage points below their pre-pandemic level, “with the participation gap primarily reflecting early retirement and demographic changes”.

If this does not happen, the economy would be in a worse position. Fewer workers mean fewer paychecks, less money flowing through the economy, and ultimately less production.

It would also mean employers would have to keep increasing wage rates to compete for a much tighter supply of labor, and they could pass on their rising labor costs to consumers in the form of higher prices. Such an outcome would be bad news for the Fed, whose job it is to achieve both maximum employment and price stability.

While inflation has risen this year and the central bank’s preferred index rose to 3.9 percent in May, officials have expected those pressures to ease as the economy goes through an unusual and unpredictable period of reopening. A wage and price feedback loop could change the equation.

“What would be worrying were wages across the economy at unsustainable levels without high inflation,” said Jerome H. Powell, chairman of the Federal Reserve, at a press conference in June. “It’s one of the old formulas for high inflation. We don’t see anything like that now. “

The new data comes at an important time for the Fed. Policy makers are starting to debate when to curb their monthly bond purchases of $ 120 billion and have said they would like to see “significant” progress towards full employment and their average inflation target of 2 percent before they do . While the price gains were rapid, the labor market fell short.

Officials said they are not discussing rate hikes yet, but how long it takes to reach full employment will determine when they do so. The Fed has declared that it wants to achieve maximum employment and inflation on a sustainable basis before raising its key interest rate from near zero, where it has been since March 2020.

“We still have a long way to go,” said Skanda Amarnath, executive director of Employ America, a group that is pushing business leaders to focus on stronger labor markets. “Part of it is not to become complacent, not to take your foot off the accelerator and not to hit the brakes prematurely.”

In any case, policymakers will need to monitor the data over the coming months to better assess how far the labor market needs to recover – and how long it will take. For now, the critical wildcard is when the workers will return.

“Bottom line, there is no doubt that labor demand is robust,” wrote Bank of America economists in a note following the report. “The supply of labor remains the challenge.”