Americans Lured Off Job Sidelines May Also Limit Pay Gains

  • Wages rose less-than-expected 2.5% in June from year earlier
  • Report seen as keeping Fed on track for tightening this year

U.S. Adds 222,000 Jobs in June, Jobless Rate at 4.4%

The U.S. labor market was robust enough last month to draw more Americans off the sidelines and into the workforce. The same trend may also be keeping wage gains subdued.

While payrolls grew by more than analysts forecast and the unemployment rate barely ticked up from a 16-year low, worker pay rose a less-than-expected 2.5 percent in June from a year earlier. Separate figures on labor flows showed a record number of people found employment after joining the workforce, helping push up the participation rate.

The entry of so many people is a sign that the labor market is still absorbing slack, supporting the views of both President Donald Trump -- who has talked about the need to get millions of Americans into jobs -- and Federal Reserve Chair Janet Yellen, who has mentioned the pool of those who could still find work.

Highlights of Employment (June)

  • Payrolls rose 222k (est. 178k); April-May revisions added 47k jobs
  • Unemployment rate, derived from a separate survey of households, rose to 4.4% (est. 4.3%) from 16-year low of 4.3%
  • Average hourly earnings rose by 0.2% m/m (est. 0.3% rise); up 2.5% y/y (est. 2.6%)

That could help explain part of the puzzle of why hiring has shown sustained strength at the same time that worker pay has been relatively weak. One hope is that a tight labor market will eventually result in an acceleration in wages, but with more people getting into the labor force, that threshold may still be some ways away.

“The wage numbers have been subdued,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “There are a number of possible explanations for it: There’s talk about shadow slack, there’s the timid nature of workers in an age of a globalized labor force, and it could just be that it takes time for the slack to transmit into a tighter labor market that generates faster wage growth.”

The lack of faster earnings growth isn’t just a disappointment for workers. It also matters for policy makers because it has the potential of feeding into inflation -- which has eluded the Fed’s goal -- and progress on that front would play a role in determining the pace of interest-rate hikes by the central bank.

“The trend in employment growth remains more than strong enough to keep the unemployment rate trending down, which we expect will add to upward pressure on wages,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York, said in a note after the report. “That said, for now, the wage data are tame enough to keep the debate about the relationship between slack and inflation very much alive.”

Alternate View

Some analysts look to other explanations. While wage growth is running below the peak of previous expansions, the figures may be depressed by weak productivity and the retirement of high-earning Baby Boomers, according to economist Stephen Stanley of Amherst Pierpont Securities LLC. He doesn’t quite buy the shadow-slack view.

“We’re at a point now where the bulk of that activity has probably happened,” Stanley said. “If you look at the number of people who said they were not in the labor force but still wanted to work, it’s come off a lot in the past year.”

The labor flows data also come with some caveats. The jump in those coming into the workforce and finding employment may have partly reflected a new graduating class and the summer’s seasonal workers -- some likely welcomed by employers who are struggling to fill open positions.

While wages were a weak spot in the June report, it still marked a relatively strong finish for the labor market in the second quarter. That should support continued gains in consumer spending in the coming months and probably keep the Fed on track with plans to start reducing their balance sheet and increase borrowing costs once more this year.

This report bolsters the view that the economy is “still on solid footing,” UBS Group AG economists led by Seth Carpenter said in a note today.

“The Fed has noted that they have essentially achieved full employment and are forecasting a pickup in inflation,” Carpenter wrote. “As we see it, this report will not change their minds on what to do with policy.”

— With assistance by Jeanna Smialek

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