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The US Payroll Disconnect

Posted by Joseph Trevisani on Dec 2, 2016 12:12:33 PM

The 178,000 jobs created in November are evidence of one reality, a labor market steadily seeking new workers, while unemployment, wages, the participation rate and weekly hours show another, where people forsake employment and a large pool of under-employed individuals keeps a lid on wages.

Payrolls stayed on an even keel in November, coming in just under the average for the year and the forecast for the month, both 180,000. For the 35 months since the beginning of 2014 the economy has created an average of 221,000 positions each month or 7.735 million new jobs, according to the Labor Department.

That is as good a run as any in the past twenty years.

With the recovery moving into its eighth year, a tightening labor market should be drawing potential workers from the sidelines, temporarily raising the unemployment rate. A growing shortage of workers should be pushing up wages. Neither is happening.

The unemployment rate fell 0.3 percent in November to 4.6 percent, an unusually large drop for a single month. But it was not because more folks found a job but because 446,000 Americans stopped looking for work, bringing the number of people not in the work force to an all-time high of 95.1 million.

This brought the labor force participation rate back down to 62.7 percent just 0.3 percent above its 39 year low. The rate has now lost half of its improvement from 62.4 percent in September 2015 to 63.0 percent this past February. With the plentiful supply of employment it is a puzzle why so many people are choosing to avoid work.

Wages show a similar lack of proper response. Average hourly earnings fell 0.1 percent in November a sharp reversal from October's 0.4 percent gain and the first decline since December 2014. More disconcerting the annual wage increase slipped to 2.5 percent from 2.8 percent. That post-recession high had been touted by some analysts as proof that the job economy was beginning to shake off the wage restraints of the recession.

In November wages gave back more than half this year's 0.5 percent jump from the March low of 2.3 percent. Wages gains have averaged 2.5 percent this year. This is better than the 2.0 percent average for most of the prior six years, but it is 20 percent below the 3.2 percent average annual wage increases in 2007 and 2008.  There is little indication that the supposed shortage of workers is forcing firms to increase compensation to attract new employees or retain existing ones.

Finally, weekly hours exhibit the same curious lack of urgency.  When employers require more production they turn first to their own workers, adding hours and overtime.  But average weekly hours have been the picture of lassitude, varying just three tenths from 34.3 to 34.6 for the last five years. At 34.4 in November they are on the average for the year with no sign that employers are asking their workers for a bit more hustle.

Part of the explanation for the lack of wage pressure from the historically low unemployment rate lies in the Labor Department classification of all hires, whether full or part time, as new workers.

When the large component of part-time employees in the payroll numbers is combined with the percentage of low wage jobs in retail, health care and like fields, 44 percent of the total in November, and the large pool of unemployed workers simply not counted as such by the government, the absence of wage pressure is understandable.  

That the economy is producing a steady stream of new jobs is undeniable, that those jobs are equal to historical levels of full economic employment is another question entirely.


Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg, Bureau of Labor Statistics


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