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US job market – ‘Substantial further progress’ not in sight

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Mark Allan
 

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At the current rate, we expect it to take until late 2022 for the US labour market to return to pre-pandemic conditions, disappointing both the administration and the Federal Reserve whose policies have to sought to overcome the massive job losses from the pandemic more quickly.

  • High unemployment benefits are probably holding back job gains in the lowest paid sectors, but as those unemployment payments expire, job creation should pick up.
  • In higher-paying parts of the economy, the failure of job creation to be faster is a mystery.
  • The Fed has indicated it intends to start talking about tapering quantitative easing (QE) at its June policy meeting. With the jobs market not making ‘substantial further progress’ [1], the actual unwinding of support measures looks unlikely to start before year-end at the earliest.

The US created 559 000 jobs in May, which in the broad sweep of history is an impressive rate. However, last year’s lockdown-related collapse left employment about 10 million jobs below trend. Neither the Fed nor the administration could be content with it now looking like it will take until late 2022 for the labour market to return to its pre-pandemic state.

A bounce, but there is way to go

The job gains so far this year have been heavily concentrated in the sectors hardest hit by Covid (see exhibit 1). However, even in sectors that were less affected by the collapse in spending on consumer services, social distancing requirements and other public health restrictions, overall employment remains clearly below pre-Covid levels.

With indicators of business confidence close to, or at record highs, and job openings widespread, it seems hard to believe that a lack of aggregate demand is the reason why employment is not recovering faster.

Exhibit 1 - US job creation in 2021 has been skewed heavily toward sectors hard hit by Covid restrictions in 2020

Is it about more than generous benefits?

Currently, unemployed workers are receiving extremely generous unemployment benefits (an extra USD 300/week). This will fade away over the summer and be gone completely by early September.

This is probably temporarily discouraging people from taking jobs in the lowest paid sectors, consistent with media reports of employers having to pay signing bonuses and the like.

Indeed, hourly pay in the leisure and retail sectors is now around 1-3% higher than the trend it was pre-Covid (see exhibit 2), and the people working in those sectors are working longer hours despite the collapse in employment in those areas of the economy.

Exhibit 2 - Wages in the lowest paid US sectors are rising faster than the earnings of all employees

Jobless benefits explain only part of what is going on. Why do firms in manufacturing, business services and other higher paying parts of the economy still have significantly fewer staff than before the pandemic? One possible explanation is that under the surface, some sectors are growing and others are shrinking and while that is going on, the rate of new hiring is limited.

En route to a ‘jobless’ recovery?

It is also possible that just as after the dot com crash, we will see a ‘jobless’ recovery in many parts of the private sector as companies adapt the new technologies developed during Covid and find that their staff are more productive and so the company can do more with less.

So far, the evidence is limited, but if this were to be the outcome, there would be a strongly disinflationary force into the medium term once we get past all the supply disruptions that are dominating the market narrative today.

[1] “The (US) economy is a long way from our (employment and inflation) goals, and it is likely to take some time for substantial further progress to be achieved”, Fed chair Powell said on 28 April 2021, adding that “it is not time yet” for the Fed to start talking about tapering its trillion dollar pro-growth and pro-inflation programme of asset purchases. Also read Taper talk at the Fed – Are we there yet?


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