Pre-Employment Report Look At The U.S. Labor Market

by: Hale Stewart
Summary

Measures from the Household Survey show that the unemployment rate is declining, the LFPR has stabilized, and the employment/population ratio is increasing.

Data from the establishment survey shows a 4-year period of consistent growth with a recent uptick in goods-producing jobs.

Wage growth remains a key sticking point.

Tomorrow, the BLS will release the latest employment report. Let's place that into context by looking at the current condition of the U.S. labor market, starting with three key measurements from the household data:

There are two unemployment rates: U3 and U6. The former is only people who are "unemployed" while the latter includes a "marginally attached" and those working "part-time for economic reasons" (reasons not their own). Both have been declining for the last five years and stand at low levels. There is some academic debate about what constitutes "full employment" -- the level below which unemployment will drive up wages. The current unemployment rate is most likely below that rate, regardless of which measure you use.

The labor force participation rate (LFPR) shows the number of people who are actually "participating" (they either have a job or are "unemployed) in the labor market. This number started to decline in the 00s as baby boomers started to retire. The decline continued at the beginning of this expansion. The left chart shows that the LFPR has probably found an equilibrium level, which the right chart shows to be in the upper 60% range.

The employment-population ratio is a narrower measure that shows the number of people who have jobs as a percent of the total population. This number has been increasing for the last five years, although the rate of increase has slowed over the last year (the "rise over run" has declined). Still, the improvement indicates a healthier situation.

The above data shows that fewer people are unemployed, the decline from retiring baby boomers has reached equilibrium, and more people are employed relative to the population. Overall the household numbers are very positive.

Let's turn to several key measures from the establishment data, starting with the total number of establishment jobs:

This is (obviously) the long-term historical trend. Right now, the total number of establishment jobs is in a clear uptrend that has been going on for a number of years, which is better shown in a chart of the last 10 years:

This is a great chart; it shows the number of jobs continually increasing, with the chart moving from the Southwest corner of the chart to the Northeast.

Finally, let's look at the pace of jobs creation:

There is a tremendous amount of noise in the monthly data, so I've used a 3, 6, and 12-month moving average of the pace of monthly job creation to eliminate that noise (data from the St. Louis FRED system; author's calculations). The above chart shows that, since 2Q14, the pace of growth has been consistently at/around the 200,000/month pace -- which amounts to four years of solid job creation.

Next, let's look at the broadest categories of establishment jobs -- service sector and goods-producing:

The left chart shows the total number of service sector jobs, which have been increasing at a consistent pace for the last five years. The Y/Y pace of increase (right chart) is down simply as a function of math -- as the numbers increases the percentage increase declines.

Employment in goods-producing industries has increased both in absolute terms (left chart) and Y/Y percentage increase terms (right chart).

And then we get to wages:

The top two charts show the short-term (five years) pace of wage growth -- which has been consistent (left chart) and is now just shy of a short-term high on a Y/Y basis (right chart). The bottom chart places this data into historical perspective, which shows that wage growth remains a sticking point of this expansion.

Overall, the US labor market is in very good shape. Unemployment is low and establishment job growth has been consistent for the last four years. Weaker than desired wage growth remains the only sticking point.

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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.