Uneven recovery.

Photographer: Joe Readle/Getty Images

What to Look for in the Jobs Report

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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When the jobs report for October is released on Friday, most of the commentary will focus on the two headline numbers: new jobs created and the unemployment rate. Yet those won’t be the best indicators of the underlying health of the labor market and its prospects. Developments in wage growth and the participation rate will provide more information and reveal the seriousness of the structural headwinds undermining U.S. economic growth and inclusive prosperity.

QuickTake Monthly U.S. Jobs Report

Intense focus on the two headline numbers is understandable because they have historically provided important insights into the functioning of the labor market and its significance for policy, especially cyclical monetary measures. And those data points played that role in recent years as the U.S. economy climbed out of the deep hole caused by the 2008 global financial crisis and the recession that followed.

After an impressive string of consecutive months of strong performances amounting to the creation of about 14 million jobs, monthly employment growth is likely to slow to an average monthly rate of around 150,000 in the next few months. Together with an unemployment rate that has hovered around 5 percent for quite a few months, this pace of job creation, under normal circumstances, would have resulted in a Federal Reserve hiking cycle that was well underway. Instead, the Fed has raised rates only once, almost a year ago.

The other two labor market indicators -- wage growth and the participation rate -- explain this historical anomaly, as well as why so many Americans still feel economically insecure, despite the robust job creation and the relatively low unemployment rate.

Even though it has improved somewhat in recent months, the labor participation rate is stuck close to multi-decade levels because only a relatively small number of Americans have re-entered the workforce. Meanwhile, wage growth has been significantly lower than historical models would have predicted on the basis of the sharp fall in the unemployment rate.

It is not yet possible to be fully certain whether it is just a matter of time before both indicators head decisively higher or whether they have been impaired by structural factors such as demographics, globalization and robot displacement, which would be far more worrisome. It will take a string of jobs reports, together with other economic data, to arrive at a conclusive answer.

In the meantime, here are some guideposts for analyzing the major combinations that could materialize in the months ahead.

The hope is that the jobs reports will show upticks from the 2.6 percent annual wage growth and 62.9 percent participation rate of the September data. Such increases would suggest that there is further slack in the labor market and, importantly, that the economy continues to respond to Fed stimulus. Under such circumstances, there would be no need for the central banks to hit the brakes hard, nor would there be cause to worry about durable and consequential damage to the responsiveness and flexibility of the labor market, the economy as a whole and the scope for higher living standards over time.

The second-best scenario would be a rising labor participation rate, which would suggest that previously discouraged workers are being encouraged to return to the market, thereby increasing the overall level of economic activity. Higher wage growth without a concurrent increase in the labor participation is a trickier proposition. It would suggest that the bulk of the labor market slack has already been absorbed and that the U.S. has to get used to functioning with a durably lower employment-to-population ratio (currently 59.8 percent). And if the wage increase is too rapid, the Fed could also fear the potential return of excessive inflationary pressures.

The worse of all outcomes would be stagnation in both of these labor market measures. This would suggest not only declining Fed effectiveness but also an unfortunate changed reality for the labor market as a whole. It also would confirm that Congress’s failure to step in with comprehensive measures has allowed anti-growth rigidities to become more deeply -- and painfully -- embedded in the structure of the economy.

This jobs report, together with those that follow, will tell a lot about the longer-term dynamism of the economy. But gleaning that information requires a shift away from the headline numbers to indicators that often get less attention than they should.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net