Here’s What the Fed Will Be Watching for in the Jobs Report

President Donald Trump and Federal Reserve Chair Janet Yellen agree on at least one thing: The underemployment rate is worth watching to monitor labor-market slack, and its recent plunge is welcome news for Americans who’ve missed out on the jobs recovery.

Count it among the good things that don’t have to come to an end, at least not soon.

While Trump called the main jobless rate “phony” throughout the election campaign, he and his administration have embraced the Labor Department’s underemployment measure, which also includes part-time workers who’d prefer a full-time job and those who want a job but aren’t actively looking. Yellen, for her part, hasn’t ridiculed the unemployment rate, but highlights underemployment as a key gauge.

That measure, also known as U-6, is falling rapidly as employers increasingly find themselves competing for workers. Its decline to 8.6 percent in April capped the biggest three-month slide since 2011, and analysts reckon it will keep dropping in coming months, albeit more slowly, as the economy’s projected rebound further encourages businesses to boost headcounts. 

“There’s a good economic reason for why this rate should continue to fall,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. With unemployment so low and wages picking up, “there’s an ability, finally, to get the marginal and part-time workers in. They do see more opportunities for work, and employers do see the need to hire given the strength of the American consumer.”

The rate’s decline underscores the bigger picture of a job market that’s surprised many analysts with its persistent gains. Employers probably added 180,000 people to payrolls last month, based on the median estimate of economists ahead of Friday’s Labor Department report. That’s in line with the year’s average pace but more than needed to keep up with labor-force growth. The main unemployment rate is forecast to hold at 4.4 percent, the lowest since 2007.

Data on Thursday indicated the labor market remains healthy. Private payrolls rose by 253,000 in May, more than forecast, according to the ADP Research Institute. Applications for jobless benefits, even with an increase last week, are near the lowest level since 1973 as employers hold on to existing staff.

Gradual Hikes

Though the unemployment rate is already below what Fed officials consider sustainable in the longer run, continued progress in mopping up the remaining labor-market slack calls for policy makers to refrain from speeding up their path of gradual hikes, according to Neil Dutta, head of U.S. economics for Renaissance Macro Research LLC. Easy borrowing conditions will nurture the economy’s expansion, which completes eight years this month, and underpin a healthy pace of job openings and hiring.

“Maybe we can let this run a little longer,” said Dutta, who, like most analysts, expects the Fed to raise interest rates at its June 13-14 meeting. “The longer we let the labor market boom, the more you’re able to get people off the sidelines.”

Fed Governor Lael Brainard’s remarks this week reflect that view. “While it is encouraging that the share of employees who work part time for economic reasons has continued to move down, there may well be slack remaining along this margin,” she said in a New York speech.

Trends that are good for workers can also pinch employers. At Bojangles’ Inc., a Charlotte-based fast-food chain known for fried chicken and biscuits, labor costs may continue to increase in part because of the tightening job market and more full-time versus part-time workers at its 700-plus locations, executives said in a May conference call with investors.

The National Federation of Independent Business reported that 34 percent of small firms in May cited job openings as hard to fill, the highest share since 2000. In another sign employers are recruiting beyond traditional pools of workers, anecdotal reports show businesses are increasingly open to hiring people with a criminal record.

Wage Growth

Even with strong demand, worker pay has yet to match its highs from the previous expansion. The May jobs report may show average hourly earnings grew 2.6 percent from a year earlier, compared with 3.5 percent a decade ago.

“The labor market is tightening but not tight,” Dutta said. Wage growth is rising but “isn’t skyrocketing. That suggests the people coming in now are still useful enough to exert downward pressure on the wages of those who are working.”

The unemployment rate is defined as the share of jobless Americans in the labor force who searched for work during the previous month. The underemployment rate, created in the 1970s, adds two more categories: Marginally attached workers, who are neither working nor looking for work but indicate they’re available for a job and have searched for one sometime in the past year; and involuntary part-timers. Both groups shrank in April to the lowest levels since 2008.

The surprise in this cycle has been that the share of involuntary part-timers hasn’t fallen quite as quickly as the jobless rate itself, which “led to the perception that maybe the unemployment rate was overstating the tightening in the labor market,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York.

One explanation, though “debated,” has been that the benefits requirement under the Affordable Care Act, or Obamacare, prompted employers to limit workers’ hours, O’Sullivan said. Nonetheless, there’s room for progress. He estimates unemployment will fall to less than 4 percent by the end of 2018, with U-6 sliding below 8 percent.

“There’s some catch-up,” O’Sullivan said. “As the pool of available labor shrinks, there’s going to be more of an effort to turn part-timers into full-time workers.”