A close look at the US labour market

6 min read 22 Nov 21

Summary: In 2020, the impact of the pandemic on the US labour market was unprecedented, with the unemployment rate in the country hitting 14.8% at its peak and the number of unemployed soaring, from some 7 million to over 23 million. In this brief note we take a close look at the US labour market today and discuss why it is important for investors to watch in the coming months.

After the strong recovery phase experienced in 2021, many market commentators now describe today’s US labour market as ‘tight’. However, the US Federal Reserve (Fed) still sees the US labour market as a long way from its full-employment ambition, particularly given the current (low) participation rate. So who is right?

Looking at the headline data, it is possible to build a case for the labour market being pretty tight: the unemployment rate in October 2021 was 4.6%,  only 1.1% above the pre-pandemic level of 3.5%. Payroll numbers are also improving significantly after some disappointment in Q3 2021. Hiring intentions are at an all-time high, which is encouraging an increase in job-switching and higher wages.

However, when we start to break down the data, there are some significant characteristics of the labour market today that are worth considering:

  1. Although unemployment is now low overall, certain groups, such as younger workers and  black and African Americans, are still suffering a significantly higher level of unemployment than other parts of the labour market. 

Source: U.S. Bureau of Labor Statistics, October 2021

2. The participation rate still remains subdued compared to 2019, standing at 61.6% in October 2021. There are still approximately 5 million people absent from the job market compared to 2019. Although some of these may have withdrawn from the labour market by opting for early retirement, others might look to re-enter the work force in the coming months. This would suggest a level of slack in the market which might cool wage growth in the future.

3. While wage growth is picking up, as evidenced by the average hourly wage and employment cost index, this is not happening in an homogenous way. Younger workers and the lowest paid  are the ones benefiting the most so far, as well as those switching jobs.

These unpredictable factors are worth watching closely in the coming months because:

  1. The Fed’s mandate to promote maximum employment means that their monetary policy decisions will be highly dependent on the evolution of the labour market, across different parts of the population.
  2. Consistent wage growth might be picked up by market participants as a signal of the reality of structural inflation (although the real relationship between the two is far from certain).
  3. If widespread wage growth is sustained and higher than both the inflation rate and productivity growth, this could negatively affect corporate profit margins.

Although investors remain focused on inflation, particularly given the high rate of growth in  US Consumer Price Index, asset prices still seem to be reflecting what could be defined as ‘transitory’ inflation, together with increasing, but still low, interest rates over the long term. The market will continue to closely monitor the Fed’s actions - and words - in response to new data from the US labour market.

At the moment, we maintain our view that the Fed’s monetary policy is likely to support a strong labour market that, as highlighted recently by Chairman Powell, ‘can deliver substantial economic and social benefits including higher employment and income levels, improved and expanded job opportunities, narrower economic disparities, and healing of the entrenched damage inflicted by past recessions on individuals’ economic and personal well-being.’

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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