Solid Job Growth
The latest jobs data suggested that a major influx of job seekers is adding to the labor force, which is holding down wage inflation and providing some additional room for the economy to grow. Part of this may be wishful thinking, specifically regarding inflation.
There was a significant surge of more than 601,000 new entrants into the labor market in June. Of this total, 266,000 do not hold a high school diploma and another 348,000 are high school graduates with no college, and, remarkably, they are predominantly women. Female participation rose by 646,000, accounting for more than 100% of the increase. All are lesser skilled, lower wage workers, which drags down the average wage rate. These people are being attracted back into the job market because the demand for labor is so strong, giving them a chance to find work, although this won’t be easy. Their re-entrance into the workforce immediately boosted the count of long-term unemployed, those out of work for 27 weeks or more, by 289,000. They will require some training, at the expense of their employers, before they can fill skilled jobs that would otherwise be filled by more educated or experienced workers.
In contrast, hiring of more educated workers has been fairly stagnant. The labor force of the college educated is essentially unchanged for several months, as is the number of employed and unemployed among this group. Unemployment for the college educated is essentially at frictionally low levels, so it remains very difficult to hire from this limited pool.
The need to hire remains elevated and unfulfilled. The May Job Openings report shows more than 7 million vacant jobs, a new all-time record. The unemployment rate for managerial, professional, and related occupations is a mere 2.5%. So there’s quite a mix mismatch between job openings and the skills of the unemployed. Over time, the lesser skilled will likely find work, since the economy is performing quite well, with growth in Q2 expected to reach an unsustainably rapid 4%. Growth should remain quite solid for the balance of the year. So hiring is likely to continue at a rather solid pace. But the imbalance between demand and supply should exert ever more upward pressure on wage and price inflation.
It is safe to assume the Fed understands the underlying economics behind the latest employment report. So they will continue to hike the overnight interest rate at their measured pace of 25 basis points per quarter until inflation picks up and this tempered pace is proven visibly too slow.
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