The U.S. Job Market Is Better Than It Looks
There is much less to the rise in joblessness than meets the eye, while annualized wage growth is still running about 1.5 percentage points faster than pre-pandemic.
It is easy to be alarmed by the U.S. job market data we got this week.
The share of American workers quitting their jobs for better opportunities elsewhere fell to the lowest level in June 2024 since January 2018. The quarterly growth rate in the Employment Cost Index (ECI) for private sector wages and salaries slowed sharply in 2024Q2 from about 4.4% annualized to just 3.4%, which is the weakest reading since the pandemic, and not far off from the 2006-2007 average. And the unemployment rate jumped by 0.2 percentage points in July 2024, which means that the most common measure of joblessness is now up 0.8 percentage points since last spring. Individually, each datum would be cause for concern, but together they paint a worrying picture.
It is clear that the torrid pace of job churn, employment growth, and wage increases that characterized the post-pandemic recovery is over. But a closer reading of the latest indicators suggest that the underlying situation is far more stable, with less of a wage slowdown and a negligible increase in joblessness outside of the margins of the labor market. The question is whether these benign conditions will continue under the current policy setting.
This Unemployment Increase Is Different
Economic downturns normally feature large increases in the number of workers who lose their jobs and do not expect to be rehired. These “permanent” job losers are distinct from the people who enter the labor force without immediately finding a job, the people who are temporarily laid off but expect to be rehired shortly, the people who finish temporary jobs, and the “job leavers” who quit without immediately entering employment. Bad labor markets also feature large increases in the number of workers who lose their jobs and stop actively looking for work. They are not counted as unemployed, but they are counted as people outside the labor force who “want a job now”.
Importantly, the increase in the unemployment rate since the recent trough is almost entirely attributable to the categories of joblessness that are least representative of underlying conditions.