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US Employment: Jobs but not Paychecks

Posted by Joseph Trevisani on Feb 3, 2017 6:52:57 PM

The U.S. economy added to its long string of job creation in January but despite the ostensibly tight labor market annual wages saw the largest one month drop in over four years. 

Employers hired 227,000 new workers last month, up from December’s revised 157,000, reported the Labour Department in Washington DC on Friday.  It was the largest payroll gain in four months and above the 207,000 average of the past two years. The u-3 unemployment rate rose slightly to 4.8 percent as more people began to look for work.  The labor force participation rate climbed to 62.9 percent from 62.7 percent in December but it remains mired near it 40 year lows. 

Average hourly earnings rose 0.1 percent in January, just a third of the 0.3 percent forecast and December's increase was halved by revision down to 0.2 percent.  

However,  it was the much weaker than expected 2.483 percent increase in January’s annual wages, well below December’s 2.811 percent gain and  the largest one month drop since October 2012, that has cast doubt on the idea that the steady job creation of the past two years and a building shortage of workers will  force employers to raise compensation.  

The nine months to December had seen the first rise in annual wage increases above 2.5 percent since the recession. From April 2016 to December annual wage gains averaged 2.67 percent the best since July 2009.

The 0.328 percent drop from December to January puts annual wage gains back below the nine month average and is a rebuke to the idea that the job market is tightening sufficiently to force wages higher. Proponents of this concept have been expecting wages to rise for many months and had cited the April to December period as proof that this was finally happening. 

The reasons behind the unexpectedly weak wage growth aren’t readily available particularly since a number of legally mandated minimum wage increases took effect in January 2017.  

While it is possible that the government recording process and bonus payments over the end of the year may have had some effect, the most likely answer lies in the large pool of unemployed and uncounted workers represented by the historically low labor force participation rate.  

A better representation of the actual state of the labor market is the underemployment or u-6 rate. This number includes those who are working part time but want full-time work and those who have looked for work any time in the past twelve months.  This rate is 9.4 percent almost double the standard unemployment rate at 4.8 percent.

There remains a substantial pool of unemployed and underemployed worker who are largely invisible to standard statistics. As long as employers can tap this body of workers there will be no pressure to increase wages.  

After the payroll release traders pulled back on bets that the Federal Reserve will institute three 0.25 percent increase in the Fed Funds rate this year, as predicted by the central bank in December.   The 10-year Treasury lost 1 basis point to 2.4648 percent and the 2-year also shed one point to 1.1969 percent.  

Federal Reserve Chair Janet Yellen has said that wages improvements are a necessary part of the economic recovery and something that the bank watches closely. 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Thomson/Reuters

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