13 Nov. 2017 | Comments (3)
In August we posted a lengthy blog about the tightening US labor market. In this blog I’ll discuss what has changed since then, and what trends became more obvious.
Improving economic conditions
In recent months it has become obvious that the global and US economies are growing faster than was expected at the beginning of 2017. The global economy is firing on all cylinders. An unusually small number of countries are currently experiencing major downturns unlike in recent years. From 2012 to 2013, much of Europe was in a recession. In 2015 and 2016, Russia and Brazil experienced a major recession, and China experienced a slowdown. In 2017 however, there are almost no areas of major economic weakness in the world.
As a result, the global economy accelerated in 2017, and the US economy benefited from it. Exports growth turned positive, and higher business and consumer confidence has supported solid consumption growth and a revival of business investment growth. And with hard data coming in strong and confidence surveys still high, there is nothing to suggest that solid growth will not continue in the coming months. The likelihood of a future corporate tax cut has increased in recent months, further raising business confidence.
Tightening labor markets
With the economy growing faster, one would expect employment to grow faster as well. That was indeed the case in manufacturing, but overall employment growth is not showing signs of acceleration. If anything, there has been a very gradual deceleration in employment growth. It may be that the degree of tightness in the current labor market is severe enough that finding the extra gear to grow employment by more than 200,000 a month is not feasible. If that is the case, employers can only double up on trying to squeeze more out of their existing workers. Indeed, labor productivity has been accelerating in recent quarters. Is it sustainable? We had some false starts of productivity acceleration in recent years, but there is more reason for it to be sustained now that the labor market is tight.
In any case, job growth is still well above the rate needed to further tighten the labor market. The unemployment rate dropped to 4.1 percent in October, the lowest since 2000. And the broader measure of labor market slack, U6—which includes those working part-time for economic reasons, discouraged workers, and workers marginally attached to the labor force—dropped to 7.9 percent, equaling pre-recession lows. Looking at a broad measure of labor market tightness that includes recruiting difficulties, time to fill positions, and retention rates, it is hard to avoid the conclusion that the labor market is already quite tight and getting tighter. Furthermore, Google Trends data show that searches for the term “labor shortage,” have been growing very rapidly in the past year, suggesting that employers are facing a different kind of labor market.
But are we seeing further acceleration in wage growth? Not yet. But as we have explained in detail here, the current extent of wage growth is in the range of what one should expect given current economic conditions in the US. Low inflation and productivity growth are holding back wage growth. Further evidence of that argument came recently from Anna Stansbury and Larry Summers who argue in a new paper that they find “a strong and persistent link between hourly productivity and a variety of wage measures since 1973”. We continue to argue that the direction of wage growth remains up. The labor market is likely to get tighter, and inflation and productivity growth are likely to move higher as well.
As we argued in the past, the tightening of the US labor market is likely to lead to more teleworking. The recent release of the 2016 American Community Survey micro data supports this argument. For the 11th year in a row, more full-time employees are working primarily from home, and in 2016 we’ve experienced the fastest growth in that rate. Employers are facing a tight labor market for the first time in an era when advanced remote working technologies are available—and the option to hire remote workers or teleworkers expands the pool of available labor. Employees will have more leverage to bargain for the freedom to work at home. More on that topic in a coming blog.