MainStreet Macro: Health Check

Last week, the government released data showing that the economy created 431,000 jobs in March. It was hard to find something not to like about this report – job gains were strong and broad-based.

But if you’re looking for areas still in need of improvement (and let’s face it, as an economist that’s kind of my job), turn to the labor force participation rate.

Even after more than a year of impressive job gains (6.5 million to be exact), the share of folks in the workforce, a metric known as the labor force participation rate, is still down about a percentage point from where it was before the pandemic. 

Recently, Federal Reserve Chair Jay Powell – not an economist, but a lawyer by training – diagnosed the job market as tight to the point of being unhealthy. Though the recovery has made tremendous progress since being hobbled by the pandemic two years ago, there’s still a nagging injury of persistent labor shortages.

Today, we give the jobs market a check-up to see if it’s really as healthy as it seems.

Quits are high, but hiring is higher

Generally, a high number of people quitting their jobs is a sign of a healthy labor market. It typically means that attractive opportunities are luring workers away from old jobs.

But the pandemic gave birth to a new dynamic, the great resignation, which has reached an extreme. In February, people voluntarily quit more than 4 million jobs, a near-record high. 

The good news is that the proportion of people getting hired, at 4.4 percent of the total labor market, is higher than the fraction of people quitting, at 2.9 percent.

That suggests that, yes, people are quitting at elevated levels, but they’re finding new jobs rather than leaving the workforce entirely

But there are symptoms of illness. Companies are posting a record number of job openings, but the job opening rate – defined as the proportion of job openings to all jobs (both filled and open) – at 7 percent trumps the hiring rate signaling that labor demand and labor supply are off balance.

Job gains are solid, but uneven

In some sectors, employment is actually higher than it was before the pandemic. Professional business services, warehousing, transportation, and retail have added headcount thanks to all the glorious consumer spending that has remained resilient during the recovery.

But some industries haven’t reaped benefits of the pandemic economy, namely consumer-facing industries that still have lost ground to make up. Leisure and hospitality is down 1.5 million jobs.  

Wages are growing, but short of inflation

Wage growth is an important part of a healthy labor market. But when it comes to inflation, you can have too much of a good thing. If wages are growing so fast that they outpace productivity gains, they could add to already uncomfortable inflation.

For now, wage growth is lagging inflation. The biggest drivers of price increases are supply bottlenecks caused by the pandemic.

That said, wage growth is definitely something that we and everyone else concerned about inflation will continue to monitor. 

My diagnosis

I give the job market a decent, but not perfect, bill of health.

Opportunities are plentiful, but the labor market isn’t meeting employer demand.

Sectors that benefited from the pandemic economy are booming, while others hard-hit are still trying to find their footing. 

And the old inequalities of the past still reign in the present. Black unemployment is about twice the rate of white unemployment – a historical pattern that becomes more pronounced whenever the jobs market is ailing.

We’re nearing a tipping point, where the number of employed people is roughly the same as it was two years ago. The economy is solidly back on its feet, but we’ll need to keep monitoring its vitals.