What to Watch on Jobs Day: Signs of more workers returning to the economy and increases in their wages
I’ll be looking at two particular trends tomorrow when the March Employment Situation report comes out. First, I’ll look at what’s happening with the labor force participation rate, along with the accompanying employment-to-population ratio and the unemployment rate. Second, I’ll continue to look at nominal wage growth, to measure the strength of the recovery’s impact on workers.
The first indicator to watch, which has showed signs of a turnaround, is labor force participation. Both the overall and the prime-age labor force participation rates appear to have bottomed out in mid-2015 and have been slowly rising the last few months, but the labor force is still down by about 2.4 million “missing workers.” These workers aren’t counted among the unemployed, because they haven’t actively looked for work in the last four weeks, but they are likely to return to the labor force as the economy recovers. Last month, we saw some signs of that return, as the number of missing workers fell and the overall and prime-age employment-to-population ratios rose slightly. There is still far to go before we reach full employment, but this is certainly an encouraging sign that we are moving in the right direction.
While the unemployment rate has been holding steady, a slight rise in coming months could actually be a positive move—if driven rising labor force participation, which would mean that potential workers see hope for themselves in the labor market and have started to look for jobs. As more potential workers get pulled back into the labor market and more unemployed workers get jobs, we should see this labor market tightness translate into stronger wage growth.
We track nominal (non-inflation adjusted) wage growth every month, and it’s abundantly clear that this indicator is still below target. On Tuesday, Federal Reserve Chair Jane Yellen talked about pursuing maximum employment, and reiterated her support for the Fed’s 2 percent inflation target. While productivity has slowed, the 2 percent inflation target would still mean targeting nominal wage growth far higher than the 2.0-2.2 percent we’ve seen over the last several years. We’re encouraged that Yellen’s speech seems to indicate that the Fed may be more patient with future rate hikes. This patience would give the economy a real chance to recover and give workers a chance at decent wage increases. Slowing the economy prematurely would be especially deleterious to lower-wage workers and to workers of color. Remember that wage growth has been sluggish for many years, so in order for workers to make up that lost ground wages needs to start rising at a good clip. As jobs day approaches, we need to remember that with a data-driven approach to policy, we may eventually reach a full employment economy.