May 5, 2006
Despite weak jobs growth in April, wages finally starting to increase
Today’s report from the Bureau of Labor Statistics shows that employment growth fell off of its recent pace, as payrolls expanded by only 138,000 last month, well below analysts’ expectations. The unemployment rate was unchanged at 4.7%, but wage growth accelerated, up 3.8% over the past year, the fastest annual rate since August 2001.
Although job gains for February and March were revised down slightly to 200,000 in both months—close to the average over the past year (excluding the impact of the Gulf Coast hurricanes)—April’s net gain of 138,000 jobs was well below trend. It is too soon to tell, however, whether this is a true downshifting of job growth or simply a one-month “hiccup.” While the economy has faced new headwinds in recent months—including higher gas prices, higher interest rates, and a cooling housing market—the general momentum of the economy and the job market has been positive.
The slowing of job growth was fairly widespread across industries with a few notable exceptions. Retail trade employment fell sharply in April by 36,000, despite signs showing that retail sales were fairly brisk. In fact, employment in retail stores has been less responsive to sales in recent months, possibly reflecting an increase in e-commerce.
Conversely, manufacturing employment was up 19,000, its best month since May 2004. The increase took place solely in durable manufacturing, with cars and auto parts contributing 12,000 of those new jobs. Even so, employment in autos and parts is down 11,000 over the past year and down over 200,000 since its most recent peak in 2000.
Other indicators from today’s report suggest continued improvement in the job market. The number of part-time workers who would prefer full-time work fell slightly to 3.98 million, its lowest level as a share of employment since mid-2001. Also, the share of the unemployed who are new labor market entrants fell to 8.1%, the lowest level since last January, suggesting new entrants are finding jobs more quickly upon labor force entry.
Some other indicators, however, still show some soft spots in the job market. The unemployment rate of African American men jumped from 9.6% in March to 10.2% in April, and stands at more than twice that of white males (4.1%). Although the rate for blacks has been volatile in recent months it is worth noting that, while the overall unemployment is down 0.8 points over the recovery, the rate for black men has not improved. It was 10.0% in November 2001 and 10.2% last month.
Also, long-term unemployment remains high despite the low overall jobless rate. Over the past year, the jobless rate has been between 4.7% and 5.1%. Historically, when unemployment has been in that range, the share of persons stuck in long-term unemployment (i.e., at least 26 weeks) was 11.3%. In April, that share is 18.6%.
A big story from today’s report is the jump in wages, with the hourly wage up 3.8% over the past year and weekly earnings up 4.1%. Both of these series have been accelerating in recent months, reflecting the tightening of the job market. However, it is important to put these gains in context.
Figure 1 shows the real (i.e., inflation-adjusted) growth in wages and earnings. Since inflation is not yet reported for April, we assume that it grew at the same rate as last month (given the increase in gas prices last month, this conservative assumption may slightly exaggerate real wage gains in April). Though wages have clearly been on the rise lately, they are just about back to where they started at the beginning of the recovery (i.e., real hourly wages are almost exactly the same and weekly earnings are up about $1.30 in April 2006 dollars). In other words, despite strong economic and productivity growth over the whole of the recovery, any improvement in the living standards of working families has come from more hours of work, not from rising real hourly wages.
It is also worth noting that in recent weeks we have seen conflicting reports regarding wage and compensation growth. Last week’s release of Employment Cost Index data, for example, showed average compensation for all workers falling behind inflation, while yesterday’s productivity report showed the opposite. A recent report on median earnings showed clear evidence of a real decline over the past year, while today’s report shows hourly wages growing at a faster clip of 3.8% over the past year.
Figure 2 compares the growth of wages and compensation by various measures, all of which compare the most recent quarter—2006q1—to the same quarter one year ago (except for the average hourly earnings from today’s report, which compares this April’s value to last year’s). Since these wage measures can be relatively erratic, annual rather than monthly or quarterly changes provide a more reliable insight into the trends.
Two of the measures exceeded inflation over the past year, while two others grew more slowly than price increases. Notably, median weekly earnings had the weakest growth over the past year. Unlike the average, this measure is not pulled up by extreme gains at the top of the wage scale and thus is more reflective of the typical workers’ paycheck.
Summarizing, despite weak job growth last month, the tightening job market appears to be finally boosting wage growth. Five years into an expansion with robust productivity growth, this wage growth has taken much longer than expected. Given this long lag, working families still have a ways to go before the growing economy significantly boosts their living standards.
—By Jared Bernstein, with research assistance by Yulia Fungard.
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