The December employment report did not offer many surprises. Rather, aside from a modest undershoot relative to expectations for the headline payroll figure, the data largely confirmed the state of play in the labor market, as the unemployment rate held steady at 4.1 percent, and the year-over-year advance in hourly earnings was unchanged at 2.5 percent.
Thus, the December release represents a good opportunity to broaden our focus and examine how the labor market performed in 2017. Payroll growth averaged 171,000 per month last year, down slightly from 187,000 in 2016.
If anything, the pace of job gains surprised to the upside, as there were broad expectations that a tightening labor market, which makes it more difficult for firms to find qualified workers, would stymie efforts to expand employment.
The better-than-expected pace of net hiring last year allowed for more tightening in the labor market than anticipated. The unemployment rate fell by 0.6 percentage points in 2017, more than double the improvement projected by the Fed entering 2017. Indeed, the debate about whether there is slack in the labor market is largely over, as the jobless rate has fallen to its lowest level since 2000.
While it is true that the employment-to-population ratio remains historically low compared to the unemployment rate, this mainly reflects the changes in the age composition of the adult population.
As increasing numbers of baby boomers move into retirement age, there will be more and more adults who are out of the labor force (the government’s definition of “working-age population” for the purposes of these calculations is 16 and over, so retirees do not age out of the numbers).
Indeed, prime-age workers (ages 25 to 54) now represent less than half of the working age population in the Labor Department’s calculation, the lowest proportion in decades.
Anecdotal and survey reports make it clear that the labor market is very tight. The demand for workers is as strong (or stronger) as it has been at any point in the expansion, but firms are struggling to fill their openings. Heading into 2018, it looks like the demand for workers will remain vigorous, but employment growth is likely to slow further, reflecting the lack of available workers.
Nonetheless, job growth should remain well above the pace needed to keep up with population gains. As a result, the unemployment rate should continue to grind lower. The jobless rate will almost certainly fall below 4 percent in 2018, and chances are that it will slide below the 2000-low of 3.8 percent over the next year or two, which would mean a nearly 50-year low.
That brings us to the wage data. Average hourly earnings actually decelerated from a 2.9-percent year-over-year gain in December 2016 to a 2.5-percent figure last month. This occurred despite broad anecdotal and survey evidence that wages are picking up in response to the tightness in labor markets.
There is widespread agreement among people in the placement industry that wages will rise noticeably in 2018. While there were many puzzling developments in 2017, I am fairly confident that the laws of supply and demand have not been revoked.
When demand for a product, in this case labor, exceeds the supply, prices need to go up to clear the market. Workers should benefit from a strong economy in 2018, as unemployment will continue to fall and wages will finally accelerate.
Stephen Stanley is the chief economist for Amherst Pierpont Securities, a broker-dealer providing institutional and middle-market clients with access to fixed-income products.