Workers Gain From Fruits of Labor as U.S. Jobless Rate Declines

Three Charts That Breakdown the U.S. Jobs Report
  • Hourly pay climbed 0.5% in January, more than forecast
  • Increases in minimum wage probably helped lift hourly earnings

The pendulum is starting to swing in favor of the American worker.

At 4.9 percent, the U.S. jobless rate in January was the lowest in eight years, prompting employers to increase pay to attract the talent needed to stay in business. Earnings per hour for all employees rose 0.5 percent on average from the prior month, the biggest gain in a year, the Labor Department reported Friday.

“The labor market is tightening and wages are doing what they do in a tightening market -- they’re going up,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “That’s good for workers, but it’s going to be a challenge for profits.”

The pool of still-available workers is shrinking enough to begin to give those with jobs added leverage in asking for a raise after years of wage stagnation. The risk is that, in an environment where consumers resist price increases, corporate earnings take a hit and companies decide they can’t afford to keep hiring. 

Over the past 12 months, hourly earnings climbed 2.5 percent, more than forecast, according to the Labor Department. What’s more, previous data were revised up to show a 2.7 percent advance in the year through December, the biggest advance since July 2009.

Minimum Wage

Some of the jump in pay last month was probably attributable to legislation as the minimum wage climbed in 14 states at the start of the year. Of those, 12 increased the floor by law, while automatic cost-of-living adjustments accounted for the boost in the other two.

The legislation “may have boosted average hourly earnings a little bit for the month, but minimum-wage jobs and other categories that are associated with that are still a relatively small component of the distribution of employment,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit. “We’re starting to see a little bit of traction as the labor market gets tighter.”

The share of the working-age population with a job climbed to 59.6 percent in January, the highest since May 2009, according to the Labor Department. While that’s still well short of the 62.7 percent when the last recession began in December 2007, the proportion has climbed over the past year even as aging Baby Boomers leave the workforce. 

Friday’s jobs report also showed payrolls advanced by a smaller-than-forecast 151,000 in January, largely reflecting payback for a pickup in seasonal hiring in the final two months of 2015. The jobless rate fell from 5 percent in December.

Fed Policy

For Federal Reserve policy makers, who last week said they were “closely monitoring” a slowdown in global growth and turmoil in financial markets to gauge the impact on the world’s largest economy, the increase in wages must come as a relief. Fed Chair Janet Yellen will testify before Congress next week and investors will be parsing her every word for signals on the future path of interest rates leading up to central bank officials’ next meeting in March.

“What this all means for the Fed is unclear, but their obsession with wage inflation makes it very risky to assume they’ll focus only on the payroll ‘slowdown,’" Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd., said in a note. If Yellen focuses on the pay increase, it would signal she believes the economy is still making progress, he said.

Stocks and Treasury securities fell as investors took the job market’s resilience as supporting the case for additional Fed interest-rate increases this year.

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