April Jobs Report: The Two-Tiered Recovery

The April jobs report continued the saga of a two-tiered labor market. The economy added 160,000 jobs and the unemployment rate remained at 5 percent. Revisions to the previous two moths amounted to 19,000 fewer jobs than originally reported. But the broad numbers may not paint a true picture of the employment landscape. The biggest complaint is that overall wage growth has been unimpressive. In April, average hourly wages increased by 0.3 percent, nudging up the annual increase to 2.5 percent. Given the impressive number of jobs added, most analysts have been promising that wage growth would soon follow, but annual wage growth has remained between 2 and 2.5 percent for the past few years, below the near-3 percent seen in previous expansions. While 2.5 percent is not a bad number, we have been here before and now need to see consistent readings that are trending higher.

It’s not supposed to work this way. If employers are having a hard time filling positions, and workers are more willing to jump ship, wages should be rising faster. However, according to economist Joel Naroff, “No matter how tight the market may be, companies are still willing to go without new hires and limit pay increases.”

It may be that the labor market is not quite as healthy as the top line measures indicate. In addition to the 2.1 million Americans who have been out of work for more than six months, the number of workers who work part-time but would rather be full-time remains at a still-elevated 6 million. According to research from the Federal Reserve Bank of Chicago, the high numbers of “part-time for economic reasons” is a contributing factor to limiting wage growth.

What appears to be happening is that workers in the high growth fields can demand higher wages, but the vast majority of workers either don’t feel like they have bargaining power or have made a different kind of adjustment: if the boss can’t pay me more, maybe I will work a little less. This could be part of the reason why worker productivity has dropped off. According to the Labor Department, in the recent 2007-2015 period, annual labor productivity has slowed significantly to 1.2 percent, the worst period since the late-1970s to mid-1980s. Naroff says the downshift is understandable because “until workers have reasons to work harder (i.e., greater compensation), they will find ways not to work harder.”

Of course, with corporate earnings set to drop for a third consecutive quarter, companies are unwilling to take the first step to incentivize their workforces. This strange game of chicken is unlikely to continue for too much longer. Unfortunately, there is probably an equal probability that we see a downshift in the economy, which would spur workers to step it up; and an uptick, which would force companies to pay more.

MARKETS:

• DJIA: 17,740 down 0.2% on week, up 1.8% YTD
• S&P 500: 2057 down 0.4% on week, up 0.6% YTD
• NASDAQ: 4736 down 0.8% on week, down 5.4% YTD
• Russell 2000: 1114, down 1.5% on week, down 1.9% YTD
• 10-Year Treasury yield: 1.78% (from 1.83% a week ago)
• June Crude: $44.66, down 2.7% on week
• June Gold: $1,294.00, down fractionally on week
• AAA Nat'l avg. for gallon of reg. gas: $2.21 (from $2.21 wk ago, $2.65 a year ago)

THE WEEK AHEAD:

Mon 5/9:

China CPI/PPI

Tues 5/10:

Walt Disney

6:00 NFIB Small Business Optimism Index

10:00 JOLTS

Weds 5/11:

Macy’s

2:00 Treasury Budget

Thursday 5/12:

Kohl’s, Ralph Lauren, Nordstrom

8:30 Import/Export Prices

Friday 5/13:

JC Penney

8:30 Retail Sales

8:30 PPI

10:00 Consumer Sentiment