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15 May. 2019 | Comments (0)
In 2009, the US labor market was the weakest since the Great Depression. In 2019, after a decade of strong hiring and the retirement of about 3 million baby boomers a year, the US economy is experiencing the lowest unemployment rate in 50 years. Employers are experiencing historical difficulties in recruiting and retaining workers, especially in blue-collar and low-paid occupations. In the next 12 months, despite some slowing in economic growth, labor markets will get even tighter. For employers, rising labor costs combined with slowing revenue growth will squeeze corporate profits. Workers though, especially long-suffering ones in blue collar and low-paid service occupations, are enjoying job security and faster wage gains and overall higher job satisfaction.
During 2018, economic growth in the US was much faster than expected, even exceeding the three percent rate during the year. But in December and early 2019, a series of negative developments clouded the outlook: The federal government shutdown, escalation of the trade dispute with China, concerns about rising interest rates and the large drop in stock prices. Consumer confidence was shaken, and they reacted with very weak consumer spending – between December and February, especially in goods. Business confidence declined significantly, with a clear drop in new orders for business equipment. The R word was mentioned all over the media.
But the end of the shutdown, the easing of the Fed’s monetary policy with further rate increases off the table for now has driven a recovery in stock prices and improved confidence. In the past two months, new economic numbers have been exceeding expectations muting recession fears. The question is whether the economy bounces back to 2018’s growth rate or closer to what we think is the long-term trend rate of about two percent.
We think that the latter scenario is more likely, partly due to the very recent escalation in the trade war with China, but in both scenarios the employment growth will remain solid as it has throughout the current expansion. Given recent trends it is hard to imagine employment growing more slowly than one percent a year, after growing well above that rate since the end of 2011. And at a time when the working-age population is growing at just 0.2 percent annual rate, even a one-percent employment growth will be more than enough to continue tightening the labor market.
Tightening labor market
For many employers the current labor market is extremely tight, and the thought that it could get much tighter is quite scary. In April 2019, the unemployment rate reached 3.6 percent, the lowest rate since the 1960s. Looking at a broad range of labor market indicators, we conclude that the US labor market is now tighter than it was in 2007, which was the peak of the expansion prior to the financial crisis, and in some occupations, the tightest since at least the 1960’s.
According to the National Federation of Independent Business (NFIB), it is harder now to find qualified workers than at any other period during the survey’s history which dates to 1973. There are anecdotal reports from our members that a growing number of job candidates simply do not show up to scheduled interviews. A larger share of workers is switching jobs—the voluntary quits rate is growing and is well above the 2007 rate—and the time needed to fill positions has reached historical highs. Companies are operating with many unfilled positions and the burden on the existing workforce is growing.
Concerns about labor quality have followed. According to the NFIB, the share of businesses that cited labor quality as their main concern rose from 7 percent in 2013 to an all-time high of 23 percent in the past 12 months, making labor quality the highest-ranked concern among independent businesses. Dissatisfaction with workers’ performance seems to be more prevalent in blue-collar occupations.
A tale of two labor markets
As important as the overall tightening of the labor market, is the trend of divergence between labor market conditions of jobs that require a BA and those that do not. The unemployment rate for management and professional occupations, that include close to 40 percent of all workers and almost all college graduates, and a substantial majority of total wages, is still above 2007 rates, and has barely declined in recent years. The rest of the US labor market, typically jobs that do not require a college degree, has seen unemployment rates drop well below 2007 rates and continues to fall rapidly. In many of these occupations, especially blue-collar and low-paid services, unemployment rates are now the lowest ever recorded.
This outcome is a result of structural trends in the US labor market, including a growing share of college graduates in the working-age population and lower labor force participation rate of non-college graduates due to disability. People with a bachelor’s degree are unlikely to end up working in a blue-collar occupation, especially in a tight labor market. These trends are reducing the supply of available blue-collar and low-pay services workers.
A decline in the supply of blue-collar and low-pay services workers would not have been a problem if the demand for them was shrinking as well. But this is not the case. The demand for these workers is continuing to grow at a solid pace. This is particularly true for transportation workers. In 2013-2018, employment in transportation and warehousing industries increased by over 20 percent, versus nine percent in the total economy. This has been partly caused by the rapid growth of E-commerce during this period. In the couriers & messengers industry and warehousing & storage industry, employment grew by an amazing 33 and 59 percent respectively during the same period. In the past three years, the number of workers added to transportation and material moving occupations was roughly equal to the number of workers added to all other blue-collar occupations combined.
Another reason for the strong demand for blue-collar workers is the resilience of certain occupations, especially in manufacturing, that were expected to decline rapidly. The slowdown in the pace at which jobs have been replaced by technology in this expansion, as well as the significant decline in offshoring, is supporting solid growth in blue-collar and low-pay services employment.
Recent acceleration in wages and labor productivity
Given that labor markets are tighter for blue-collar and low-pay services workers, it is not surprising that the wage acceleration in recent years is not coming from management and professional occupations, but rather from lower-education occupations. In most blue-collar and low-pay services occupations, wage growth rates are rapidly accelerating and are back to the 2007 rates or even higher. Also driving these wage gains are the minimum wage hikes that many states have implemented in recent years. Since most high earners come from management and professional occupations, their share of total labor compensation is much higher. Therefore, growth in total labor compensation is largely held back due to this group.
Other than raising wages, employers are taking various actions to deal with labor shortages. In a later blog we’ll discuss some of these, but here I will mention perhaps the most prominent one, raising labor productivity. In 2010-2017, labor productivity in the US was growing more slowly than in any other period in US history, below one percent annual rate. But in the past four quarters labor productivity grew by 2.5 percent. It still may be too early to celebrate, but an improvement in labor productivity due to increased automation would be expected during times of labor shortages and rising labor costs.
In the next 12 months we expect the US economy to grow more slowly than in the past 12 months, but to remain slightly above the two-percent rate, and for employment to expand between 140,000-180,000 new jobs per month, down from an average of 218,000 jobs over the last 12 months. Supporting employment growth would further improve labor force participation, including older workers who will continue to delay retirement.
The unemployment rate is likely to drop to below 3.5 percent in the coming year with further acceleration in wage growth. Corporate profits rose in 2018 due to strong growth in revenues. As discussed earlier, economic activity is slowing down in 2019, so the combination of slower revenue growth and faster labor cost growth is likely to squeeze profits.
While inflation has been low in recent years and is showing no signs of accelerating, we do not rule out the option that further labor cost acceleration will feed into consumer prices, causing some price pressures in late 2019. The Federal Reserve is unlikely to raise rates this year, but given the trends discussed above is unlikely to cut rates either.
For employers these trends signal more difficult business conditions ahead. But the tightening of the labor market is a boon for workers. They are more likely to have a job, one that in many cases they are satisfied with. For the eighth year in a row, job satisfaction has increased, with a big improvement in 2018. More than half of US workers are satisfied with their jobs. Further, the recovery in labor market conditions for low-paid workers and the increase in minimum wages is contributing to a potential reversal of the trend of growing wage inequality. Measures of wage inequality have been rising for decades but have begun to decline in the last few years. As baby boomers continue to retire in large numbers through 2030, we expect these trends to continue.