The U.S. payrolls report has missed expectations for a second month in a row, although that ignores improvements in the household survey. While payrolls increased by 448,000 in November and December, the household survey showed employment gains of 1.7 million.
Evidence that the labor market is tight despite the miss in payrolls is in wages. Wages grew by 4.7% year-over-year versus expectations of 4.2%, and were restated higher for November to over 5%. In addition, as of November, per the JOLTS report, there were over 1.5 jobs open for every unemployed person.
We believe the Federal Reserve is coming around to our view on labor market tightness. Focusing on payrolls that are 3.6 million lower than pre-pandemic levels or employed persons that are 2.9 million lower is, in our view, the wrong approach. Since the pandemic, the number of unemployed persons has increased by just over 600,000 and the number of people not in the labor force who want a job has increased by just over 700,000. How do you get to 2.9 million more employed people when those categories that employers could conceivably draw from are only up by 1.3 million? That doesn’t seem plausible as those not in the labor force and don’t want a job has increased by 4.1 million.
Overall, we believe that employers are going to be focusing much more on retention in 2022. It’s been difficult for companies to find workers and the “quit rate” matched it highs in November. Wage gains have been driven by job switchers and we would expect that job stayers could start to see incrementally more gains.
The most recent Fed minutes said that, “Acknowledging that the maximum level of employment consistent with price stability may evolve over time, many participants saw the U.S. economy making rapid progress toward the Committee's maximum-employment goal. Several participants viewed labor market conditions as already largely consistent with maximum employment.”
We believe this latest employment report, even with the payrolls miss versus expectations, largely conforms with these views, and we expect to see a greater number of Fed members move to the position that labor market conditions are “already largely consistent with maximum employment.” As such, gains in employment may be more limited in 2022, although wages should continue to see gains above pre-pandemic levels.