Imported tightening is a possible risk to the Reserve Bank of Indias (RBI) current accommodative monetary policy stance, but it is likely mitigated now.
The US Fed’s new framework places high weightage on equitable job growth, does not link monetary policy action to only a headline employment number and thus focuses much more on the details of the labour market.
The Fed adopted this based on its learnings from the later stages of the US economic expansion in 2018-19, when a strong job market co-existed without an unwelcome increase in inflation, and through its Fed Listens outreach programme, where it directly engaged with the representatives of low and moderate income communities, minority groups, etc.
The US labour market thus warrants being closely tracked to understand its structure, the hit from the Covid-19 pandemic, where it is currently headed, factors which are playing out and those to watch out for. Monitoring these helps gauge the likely reaction of the Fed and the market, and thus the risk to RBI’s monetary policy.
Average unemployment rate fell to 3.9 per cent and 3.7 per cent in 2018 and 2019, respectively, from 4.4 per cent in 2017. Importantly, Labour Force Participation Rate (LFPR) increased from September 2018 to February 2020, after being flat for more than two years.
This was even better for the prime-age category (25-54 years) LFPR, which was already on an upward trajectory from 2016 and picked up further in 2019. Average hourly earnings of private non-farm employees grew by 3 per cent and 3.3 per cent y/y in 2018 and 2019, respectively, after 2.6 per cent in 2016 and 2017.
Importantly, as the Fed had reiterated then, benefits of the economic expansion had started percolating to all parts of the society. Unemployment rate for various ethnic groups and races was falling since 2011 but the gap among them had become narrower in 2018-19.
All this while core PCE (Personal Consumption Expenditures) price growth (Fed’s preferred inflation gauge) averaged 1.7 per cent in 2017, 2 per cent in 2018 and 1.7 per cent in 2019.
Labour force: Short-term factors delaying recovery?
LFPR, after the dip in April 2020 and the immediate partial recovery till June 2020, has been moving sideways for almost a year now. Dissecting LFPR by age-group, the prime-age category has been flat for a year (because 35-54 has been flat although 25-34 has been recovering) while 55+ has fallen even below its April 2020 low.
The number of people ‘not in the labour force but want a job’ is also 1.6 million higher than the pre-pandemic level and has remained so for a while now. The main factors which could possibly explain this are short-term in nature — perceived health risks and childcare requirements as schools haven’t fully reopened.
It could also indirectly depend on spouse’s employment and UI (Unemployment Insurance) benefit status. If this is indeed the case, we could expect the LFPR to recover further once these factors ebb over the next few months.
Employment: Slow recovery?
Non-farm employment level is currently 7.6 million below the pre-pandemic level. If we use the extrapolated pre-pandemic trend as reference, the shortfall is even higher. Payroll addition in recent months was below consensus expectations despite the economy gradually reopening from March.
The possible reasons are the heavy UI benefits, intra and inter-sector compositional shifts in jobs (as people’s preference could have changed), perceived health risks, child care needs and possibly even supply-side constraints which could dampen the demand for labour in the short-term.
By sector, Leisure & Hospitality, Trade, Transportation & Utilities, Education & Health services were the top three job losers when the pandemic hit.
Job addition in services, initially lagging, has now started to increase. Leisure & Hospitality, with lower wages and thus likely benefiting more from UI, has led the way here which raises the question of how big a factor UI benefits really are in discouraging workers from looking for jobs.
However, while manufacturing and the less contact-intensive services have recovered to 96 per cent + of pre-pandemic employment levels, contact-intensive sectors have more to catch up.
Unemployment: Long-term damage and UI benefits
Unemployment rate was 3.5 per cent in February 2020, 14.8 per cent in April 2020 and 5.8 per cent in May 2021. Given it is defined as the ratio of the level of unemployment to labour force, change in latter impacts assessment. Thus, employment level or the employment-population ratio could be better indicators for now.
However, rise in the number unemployed for 27+ weeks and the absence of a meaningful drop in permanent job losers warrant scrutiny. This possibly suggests — 1) if one is unemployed for long, it is difficult to find a job (they could thus fall out of the labour force) and the number of such people are rising; 2) the drop in unemployment is not primarily driven by the fall in number of permanent job losers.
Re-entrants to the labour force also have increased unemployment. This is a positive as part of it could be those who were temporarily out of the labour force but wanted a job and thus still have a good chance of finding employment.
Although weekly initial filings for UI has been falling, total number of continued claims (under various unemployment compensation programmes) is still above 15 million. While the pandemic-related additional federal UI-benefits end on September 6, 2021, some states have opted for an early exit. It is to be seen whether this increases the pace of job additions.
Employee earnings: Base and composition effects
During April 2020-May 2020, when the pandemic hit, headline average hourly employee earnings actually picked up because employment of lower-wage (service) workers were disproportionately hit and they fell out of the average calculated.
This base effect now works the opposite way to dampen the average as lower-wage service job additions are recovering. Thus, it is important to look at the sectoral trends. Increase in weekly hours worked, particularly among employees retained in private service jobs, also helped increase weekly earnings. Hours worked in manufacturing are close to pre-pandemic levels.
The highest cumulative rise in weekly earnings since March 2020 is in financial activities, professional & business services. Increase in earnings was initially more towards manufacturing and financial activities, while it now also includes leisure & hospitality, construction, etc.
Given that job additions are likely to pick up as the economy reopens progressively, UI benefits cease and if factors which temporarily keep workers off the labour force abate, could services (particularly the contact-intensive ones) see some more wage pressure before it starts easing?
Sectoral trends are to be watched too for any earnings pressure from pandemic-induced changes in job and wage preferences.
Rise in job openings and quits: Job seekers’ market for the short term?
Job openings and quits have picked up while layoffs are now below pre-pandemic levels, as per JOLTS (Job Openings and Labor Turnover Survey). Anecdotal evidence suggests difficulty in hiring and offers of higher wages, particularly in construction and food & beverages industries.
Thus, there is difficulty in both filling open positions and retaining employees. Could this point to workers having more job options (or having more confidence in finding jobs), time to choose till UI benefits expire and a change in job preferences?
This phenomenon also seems to be quite broad-based across sectors, with only education & health services witnessing a recent fall in job-openings-to-hires ratio. Quits, only in financial services, have stayed flat recently but this is likely given the strong job additions and rise in weekly earnings during May 2020 to Feb 2021.
Putting it all together
Labour force continues to be well below pre-pandemic levels, job addition has been slower than anticipated (although service jobs are making a comeback), continued UI benefit claims are still high while new ones have been falling and earnings in contact-intensive services have started to rise. However, both job openings and quits have picked up across sectors.
Lower labour demand from supply-constraints (to meet the sudden surge in demand from economic reopening) doesn’t seem to be a major contributor to labour shortage as job openings are rising.
All pandemic-related additional UI benefits will expire in early September, perceived health risks will further abate if infections don’t rise and vaccinations progress, and child care requirements will abate if schools and child-care centers reopen as scheduled. The tailwind these factors offer for job additions, the impact on wages and the inclusiveness of all this across sectors are to be closely watched.
If job additions rise as these factors abate, it should help dampen aggregate wage pressures, ceteris paribus. However, divergence among sectors on the strength, timing and duration of wage pressures will be important to track as more clarity emerges on the job-composition shifts caused by the pandemic (e.g. change in requirements as businesses adapt, reluctance of labour to get back to similar jobs as before, whether these are short or medium-term trends, skill mismatches it could create, etc.). This will have implications for inflation as well.
The interplay of all the above factors is likely to have created the dichotomy that exists within the labour market today — high number of job openings and quits which typically indicate a tight labour market, but the fact remains that the economy is still 7.6 million short of its pre-pandemic non-farm employment level and recent job additions have been below expectations.
Will this widen before it gets better? If so, will the rise in wages till the likely pick up in job additions be stronger and will this prove sticky? The next few months will thus be crucial. The Fed, under its new policy framework, will also be watching very closely whether the labour market recovery is equitable.
(Source for all figures: CEIC, US Bureau of Labor Statistics (BLS), IDFC MF Research)
(Sreejith Balasubramanian is Economist-Fund Management, IDFC AMC. The views expressed are personal)