April Jobs Report: Seeing Evidence Of A Tight Labor Market

Summary

• The jobs report was weaker than was economists hoped, although the unemployment rate did decline to a 17-year low.
• Unlike the overwhelming bulk of the recovery thus far, the majority of the job creations in April were in high-paying sector.
• This did not increase average hourly earnings as much as expected, as the increase appears to be driven mostly by an increasing quantity of overtime hours.
• The labor force participation rate remained static, which could be somewhat concerning for forward economic growth.
• We definitely see signs of a tight labor market here, although the amount of potential labor still sidelined could have major effects one way or another.

Well, it has been another month since the last jobs report, so the Bureau of Labor Statistics released yet another jobs report on the first Friday in May, right on schedule. The headline numbers were mixed as the unemployment rate declined to 3.9%, its lowest level in seventeen years, but the job creation numbers were lower than what economists expected. We did certainly see some positives in this report, including the improvement of a trend that I have long been critical of.

According to the Bureau of Labor Statistics, the United States economy created 164,000 non-farm jobs in April, somewhat worse than the economist consensus of 193,000. It is important to look at the industries in which jobs were created. When we do, we do see some evidence to support the economic recovery narrative that the mainstream media has been trumpeting since the early days of the Obama presidency. Here are the industries that created jobs in April and how many each created:

Source: Zero Hedge

As we see here, the top three job creating industries in April were professional & business services, education & health, and manufacturing. With the exception of some healthcare and education jobs, these are overall middle-class jobs that are easily capable of supporting a family in relative comfort. This is therefore a very desirable shift from the part-time and low-paying jobs (primarily leisure & hospitality and retail trade) that have dominated the current economic recovery since it began. These three industries combined accounted for approximately 98,700 of the 164,000, or 60.2%, total jobs created during the month. We also saw notable contributions from mining and logging, information, and financial activities sectors. These sectors are also relatively high-paying, which likewise shows that the economy has finally begun to create worthwhile jobs for skilled workers seeking to support a middle-class lifestyle.

This emphasis on high-paying job creations might be expected to cause hourly wages to increase. Indeed, this did happen, but we do see a surprise in the data. This chart shows the average year-over-year percentage growth in average hourly earnings:

Source: Zero Hedge

As shown here, despite the increasing claims about a tight labor market, the rate of growth in average hourly earnings actually declined month over month. In fact, with the exception of March, it has been broadly weakening over much of this year. In January, one of the primary drivers of the increase in average hourly earnings was a decline in average hours worked, while weekly earnings remained static. This trend has now reversed, and the nation's workers are working a growing number of hours:

Source: Zero Hedge

This is being driven by a surge in overtime hours worked, which are now at their highest levels in more than a decade:

Source: Zero Hedge

As overtime hours are quite expensive for companies, managers do not like to have employees work them unless it is absolutely necessary. The fact that we are now seeing overtime hours surge is undoubtedly evidence to support the widespread claims of a worker shortage. As hourly employees earn substantially higher wages during overtime hours than during regular hours, this has the effect of increasing average hourly earnings. However, in the case of salaried employees that are paid a set amount per week, an increase in overtime hours actually has the effect of decreasing average hourly earnings. In aggregate, what we are seeing with rising wages may not be wage inflation but instead a function of rising overtime caused by a lack of workers.

It is always important to make sure that the economy creates enough new jobs to account for population growth. I have seen several figures as to how many jobs this actually is, although 250,000 seems to be the most common estimate. If this figure is correct, then we should be quite disappointed with this report. It would also be somewhat confusing as to why the unemployment dropped in such an environment. However, a few years ago, the Atlanta Federal Reserve created a calculator that determines how many jobs need to be created per month in order to provide sufficient work for the new people in the labor force due to population growth. As of today, that figure is 106,872 new jobs. As the economy created more jobs than this last month, we should see the labor force participation rate increase as formerly discouraged workers re-enter the labor force in order to take the jobs in excess of the number needed due to population growth.

This did not happen in the month of April, however. According to the Bureau of Labor Statistics, both the labor force participation rate and the employment-population ratio remained static at 62.8% and 60.3%, respectively, during the month. As these two rates remained unchanged, it appears that nearly all of the new jobs went to people that have been looking for work over the past several months with relatively few discouraged workers entering the labor force prompted by the tight labor market.

I have long bemoaned the fact that the labor force participation rate never recovered from the last recession. This is shown clearly here:

Source: Federal Reserve Bank of St. Louis

As it appears that relatively few discouraged workers have re-entered the labor force, we may be seeing a new normal level for the labor force. This could serve as a drag on the economy due to the large number of unproductive people. It could also limit future economic growth as the unemployment rate has little room to decline further, which would largely limit future new job creation to the rate of population growth. This would limit the ability of companies to grow since the manpower available to carry out that growth is limited.

In conclusion, there were certainly some good things in this jobs report despite the fact that it failed to meet the expectations of analysts and economists. We do see some very real signs that employers are hurting for people to perform the work that they need done. This could serve to put a limit on future economic growth unless discouraged workers become convinced to enter the labor market and seek out work.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.