It Must Workout, because the U.S. Labor Market is Tight

First things first. The U.S. Labor market is maybe the 172nd most important news item in the world right now. I usually wait for the monthly jobs report like a kid on Christmas (sad, I know). But, with Ukraine struggling for its freedom, I barely noticed the release last week. If, like me, you want to help Ukraine, the World Central Kitchen is a charity vetted by my church that is providing meals to Ukrainian refugees. If you have the means, donate.

Second things second. The Bureau of Labor Statistics did release its monthly jobs report last week. And, the news was mostly good. Much like “The Situation” of Jersey Shore Fame, the U.S. Labor Market Situation is tight. (I can’t believe I just wrote that. And, I can’t believe I’m not deleting it.) There seem to be more job openings than workers. Remember when all those pundits thought getting rid of extended unemployment benefits would solve the labor market shortage? Wrong. As I thought.

Today, I want to walk through the big picture, talk about some remaining inequality, and look a bit at where things might be headed.

The Big Picture: A Tight Labor Market

To be clear, when Economists say the labor market is “tight,” they don’t mean it looks good in spandex. What they mean is that there are fewer candidates available than are demanded by employers. Such a labor market is characterized by two things. First, low unemployment, with a small pool of workers who actively want a job but can’t find one. Second, high rates of job openings, with many employers seeking new workers out of that small pool.

The figure below shows trends in both the unemployment rate and job openings since the turn of the century. The figure makes it clear — unemployment is nearly at a two-decades long low and job openings are at a high. Tight.

Figure 1. Unemployment and Job Openings Rate Since 2001

The other good news is that these job openings are fairly widespread. The highest rate is where you would expect it — in leisure and hospitality. In this recovering industry, the opening rate is nearly 10 percent, meaning for every 10 employees there is one unfilled opening. But, middle-class sectors like transportation and manufacturing also have rates far in excess of what’s typical. So, it’s not only lower paying jobs being created.

So, the job market is generally good, with growth seeming to benefit a variety of workers. But, I live by the Economist’s Creed. Say something good, say something bad.

A Spot of Bad News

While solid, two things about the job report gave me pause. The first is continued inequality in the unemployment rate across race. The second was a lack of overall wage growth, especially in the face of inflation.

Labor Market Inequality

The U.S. labor market has a substantial amount of inequality, even in good times. And, despite the very tight labor market, that inequality persists. Figure 2 shows how the unemployment rate has evolved since February 2020 for Black versus White workers. The figure makes it clear that nothing has changed from pre- to post-pandemic. In February 2020, the Black Unemployment Rate was twice the White one. In February 2022, that ratio is unchanged.

Figure 2. Black Versus White Unemployment Rate, February 2020 – February 2022

Lest you think that the difference is just educational attainment, it isn’t. No educational group — even high school dropouts at 4.3 percent — has an unemployment as high as for Black workers. And, remember, the unemployment rate only considers people looking for and willing to work. So, Black workers who want and are looking for a job are twice as likely not to have one. It shouldn’t be surprising that the Brookings Institute found hot labor markets are never enough to close racial employment gaps. Discrimination likely plays a role.

So, while the tightest labor market in decades is benefitting all groups of workers, it likely won’t be enough to wipe away the pre-existing inequality. It’s worth remembering that there’s still work to be done.

Tepid Wage Growth

One thing a tight labor market should lead to is wage growth. If the demand for workers exceeds supply, one expects wage increases that will ultimately get the labor market back to equilibrium. And, that has been happening, with average wage growth in the last year in excess of 5 percent. Plus, that growth has been fastest at the bottom of the distribution for once, with lower-income workers leveraging some of their new found power.

But, the February report only found tepid average wage growth. Average hourly wages were up just a cent in February 2022 relative to January — basically zero. Seeing as inflation has been averaging about 0.6 percent per month, wages would need to rise by about 20 cents per hour to keep up. That’s 20 times faster than they did rise!! This tepid growth may just be a blip, but given that inflationary pressure is likely to get worse in the near-term, wages’ ability to keep up is worth keeping an eye on.

The Labor Market Going Forward

Right now, the U.S. Labor Market is strong. In the coming months, I’m looking for a few things. First, if the labor market continues to perform well, will persistent racial inequality in unemployment lessen? Based on the past, I have my doubts. And, if an unprecedented number of job openings doesn’t help equalize things, maybe its time for our society to admit the free-market alone might not be enough.

Second, will this strong labor market performance continue to translate to wage growth? This question is key, as the American Public is going to need to tolerate inflation in the coming months. The cutting of Russia’s oil supply due to its invasion of Ukraine is justified and necessary. But, the cost the public needs to bear at the pump will be easier to swallow if wages can at least partially keep up with gas prices. Was February 2022 a blip, or the beginning of a trend?

Finally, will the strong labor market persist? The uncertainty ringing through markets due to Russia’s invasion of Ukraine could lessen investors appetite for risk, limiting growth. If this does happen, I hope that our government is prepared to help support U.S. citizens who are affected by any job loss. Doing so will help ensure that the U.S. public keeps up its current support of economic sanctions against Russia. These sanctions are one of our best ways of supporting the Ukraine at the national level. At the individual level, if you have the means, don’t forget to donate.

Leave a Reply