Running Out of Workers
Payroll employment has slowed because of the growing scarcity of labor, although wage inflation has not picked up to a worrisome degree. Economic theory cannot predict when the ever tightening labor market will drive up wages and inflation. Empirical estimates to project wage trends are simply not sufficiently robust or accurate enough to pin down a reasonable time framework. So, we simply don’t know when this might happen. Even so, upward pressure on wages should be inevitable as a direct result of the imbalance between supply and demand. The Fed understands this, which is why we expect it to hike rates at its upcoming June meeting and will likely do so again in September. To sustain the expansion, the Fed must moderate economic growth closer to the pace of labor force increases and this will take time.
The decline in the unemployment rate to 4.3% contrasts sharply with the slower pace of job growth. In fact, the two are related. As unemployment falls, labor becomes ever scarcer and firms have a tougher time finding workers to fill job vacancies. Job openings are hovering around record levels of roughly 5.75 million, even as the unemployment rate has hit its lowest level in 16 years, and the time it takes to fill a job has lengthened considerably. It is now common for businesses to complain that they are unable to hire the workers they need. On Friday, the State of Maine announced it would release prison inmates to fill summer jobs!
The real oddity is the failure of average hourly wages to increase more quickly as a reflection of the scarcity of labor. But, a few factors may be distorting the behavior of average wages. It is widely known that baby boomers are retiring at a rapid clip. These are experienced workers earning peak salaries, but they are being replaced by younger workers at much lower pay scales, which brings down the average wage. The average is also reduced by the outright scarcity of higher paid college educated workers, whose unemployment rate has been nearly unchanged for two years at frictionally very low levels. Instead, firms have been hiring less educated workers, who are somewhat more available, almost certainly at lower wage rates. This change in the mix of workers hired also tends to reduce the average wage. The Employment Cost Index, which tries to adjust for changing worker mix, suggests a faster rate of increase of labor costs. But this more accurate quarterly measure receives less attention than the monthly average wage rate figure.
Replacing experienced baby boomers with younger, less educated workers may also be a factor hurting productivity. It can also hurt business profitability, unless firms are careful to avoid overpaying just to get the bodies in the door. One highly visible response is the marked decline in layoffs. Firms are clearly trying to avoid firing employees, presumably because they appreciate that replacing workers may be quite difficult.
So, we conclude that the data shows the labor market behaving exactly how one would expect for an economy in the later stages of expansion. We also see some wage pressure, albeit mostly in the quarterly ECI. Sooner or later, it should also show up in the average wage rate. In the meantime, we are mindful that firms that are labor intensive, including restaurants, retailers, and construction as examples, may experience meaningful upward pressure on their cost structure in the coming quarters, which may hurt their profit margins if they can’t be passed along promptly to customers.
Advisors Capital Management, LLC is an investment advisor registered with the United States Securities and Exchange Commission. Registration does not imply any degree of skill or training. All investing carries risk, including the potential for the loss of principal and past performance is no guarantee of future results. This content is for informational purposes only, can change at any time without notice, and is not investment advice or a recommendation to trade any security. Indices are not available for direct investment. We only provide services in jurisdictions where we are registered. Our disclosure brochure (ADV Part 2A) and customer relationship summary (ADV Part 3) are available at https://adviserinfo.sec.gov and upon request.
