The unemployment rate drops to pre-pandemic levels
Despite signs that economic growth may be slowing, there are few signs of any letup in job creation. It’s been a tight labor market, and it appears likely to remain so in the near term.
Nonfarm payrolls rose by 678,000 in February, easily surpassing expectations for a gain of about 400,000 workers for the month. Revisions to the preceding two months tacked an additional 92,000 onto that total, lifting the total to 770,000 more jobs than had been reported a month ago. The three-month average of 582,000 points to a steady gain in a very healthy jobs economy.
The strong payroll gain pushed the unemployment rate down to 3.8% — its lowest point since February 2020, immediately before the pandemic broadsided the U.S. economy.
Solid momentum in job creation suggests that despite inflationary worries, the economy is still growing at a strong clip in nominal terms. Although February PMI data suggested that the pace of the advance may be slowing, overall demand remains solid.
Gains were solid across most industries but were particularly concentrated in the service sector, which saw a gain of 549,000, including 179,000 new jobs in leisure and hospitality. Continued gains are a sign that the industry, which was hit particularly hard and has lagged the broad economic recovery, continues to make a comeback. Nearly half of the jobs in leisure and hospitality were lost in the span of two months in early 2020. About 6.7 million have since come back, but the remaining hole of 1.5 million compared to February 2020 suggests that there’s still room for continued gains.
Recent adjustments to seasonal adjustment factors provided greater clarity around the steady momentum in labor market conditions during 2021 that has carried through into 2022. The U.S. economy has added at least 400,000 jobs every month since May 2021. Structurally, it seems clear that the labor market is on a strong footing as payrolls increase steadily, labor force participation increases, and the unemployment rate sits below 4%.
There has been a growing concern about the potential for job creation to stall as the pool of available workers dries up. That’s clearly a risk, but one that has been mitigated in the near term by improvement in the labor force participation rate, which rose again in February to 62.3%. That’s still below the 63.4% rate at the end of the last expansion, suggesting that there’s room for more sidelined workers to reenter the labor force over time.
The labor force increased by more than 3.6 million over the past year, well above the estimated 2.4 million increase in the civilian noninstitutional population — the government’s best estimate of the potential workforce. The availability of vaccines, the gradual reopening of the economy, the phaseout of various government benefits, and a growing number of Americans looking to move past the restrictions of the pandemic have all contributed to more Americans returning to the workforce. Given the strength of wage gains and an abundance of available jobs, this is a trend that will likely continue in the near term.
Among the greater surprises in the February jobs report was the mediocre one-month increase in average hourly earnings, which rose by just a penny. It’s possible that the answer lies in the composition of the payroll gains favoring lower-wage jobs in leisure and hospitality. It’s certainly not a function of easier hiring conditions or less competition. The 5.1% gain in average hourly earnings over the past 12 months is probably a better reflection of an exceptionally competitive labor market.
A recent study from the Federal Reserve Bank of Atlanta revealed that millennial and Generation X labor force participation decisions are much less responsive to wage changes than baby boomers of the same age. The pandemic’s effect on how work is conducted has undoubtedly played an integral role in an employer’s ability to cajole laborers back to work, introducing a whole new menu of nonwage incentives for candidates. Greater flexibility has value, although it’s impossible to put a price tag on. For many workers though, it matters. Many employers will need to remain creative to compete in a labor economy in which the demand for flexibility has perhaps never been greater or more possible.
The bottom line? The labor market remains healthy and shows little evidence of slowing down. Stronger labor force participation should help to ease hiring pressures, while increasing the potential for outsized job creation to be extended.
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