The US economy added 559,000 jobs in May, similar to the average of 533,000 jobs over the previous three months and much faster than the pace in the three months before that. This still leaves the economy 10 million jobs short of its trend. At the same time the unemployment rate fell to 5.8 percent, but labor force participation also fell slightly and is lower than it was last summer. The “realistic” unemployment rate (which adjusts for the unusually large reduction in labor force participation) also improved.
Although employment remained well short of normal, numerous other signs were more characteristic of a very tight labor market. Job openings are at record levels and in March the quits rate was at a historic high. There were 1.0 job seekers for every vacancy, still somewhat less tight than the pre-pandemic labor market. In addition, wages for production and nonsupervisory workers rose 0.5 percent in May, an increase that likely understated the true increase in wages because of the addition of lower-wage workers in sectors like leisure and hospitality. Holding the industry composition constant, wages grew by 0.6 percent, or 7.2 percent at an annual rate, making composition-adjusted wage growth in April and May faster than in any pre-pandemic two-month period since the early 1980s.
The relative importance of factors holding back supply is not fully understood. The largest factor may simply be that it takes time for workers to reconnect to jobs as job flows in the economy remain very high. In addition, COVID-19 was still relatively prevalent in May as much of the population remained unvaccinated and many states were just beginning to adjust their public health guidance. These factors interact with unemployment insurance which can allow workers to take longer to rethink their careers, try to find jobs in new industries and negotiate for higher wages—but can also slow employment growth and prolong long-term unemployment.
Total hours were 5 percent below trend in May while final demand by domestic purchasers was very likely above trend. The question in future months is how much more does demand rise and when and how does supply—particularly jobs—return.
The Labor Market Remains Well Short of Normal
The state of the labor market can be understood by looking at the set of indicators shown in the table.
|Labor market dashboard|
|May 2021||Difference from pre-pandemic value/trend|
|Nonfarm payroll employment (thousands)||559||-9,959|
|Unemployment rate||5.8%||2.3 pp|
|Realistic unemployment rate||7.3%||3.9 pp|
|Employment-population ratio||58.0%||-2.8 pp|
|Labor force participation rate||61.6%||-1.4 pp|
|Job openings rate||5.9%||1.5 pp|
|Unemployed per job opening||1.03||0.22|
|Average hourly earnings, total private||0.6%||#N/A|
|Average hourly earnings, private production and nonsupervisory||0.6%||#N/A|
|Note: May 2021 value is 1-month change for nonfarm payroll employment and average hourly earnings. Pre-pandemic trend based on log-linear regression of values from January 2018 to December 2019 for nonfarm payroll employment. Pre-pandemic (February 2020) value for remaining measures. Difference from pre-pandemic value for employment-population ratio and labor force participation rate adjusted for changes in the age-sex composition of the population. Job openings are estimated based on growth in Indeed Hiring Lab job postings. Average hourly earnings growth is chain-weighted based on aggregate hours by industry sector.
Sources: Bureau of Labor Statistics via Macrobond; Indeed Hiring Lab; authors' calculations
The gap between the labor market and normality narrowed in May but the economy still remains 10 million jobs short of its pre-pandemic trend as shown in figure 1. At May’s pace of job growth it will take until August 2023 to close the jobs gap, and maintaining the May pace will be difficult as the lower hanging fruit of reopening is picked.
The gap is also evident in the unemployment rate, which remains elevated, but especially in the “realistic” unemployment rate which adjusts for misclassification and the unusually large decline in the labor force participation rate. While the realistic unemployment rate continued to fall in May, the unusually large decline in labor force participation got worse as more people left the labor force, even as the official unemployment rate fell (figure 2). In total 2.2 million fewer people are in the labor force than would be expected given the overall state of the economy. This is consistent both with the still depressed labor force participation rate and employment-population ratio which are 1.4 and 2.8 percentage points below their respective pre-pandemic values (adjusted for demographic changes).
Employment losses have been particularly large for more vulnerable workers, with workers with a high school degree or less experiencing the largest job losses in the initial collapse of the economy. While they experienced rapid initial recovery, progress has slowed and they are still suffering from the largest jobs shortfall as shown in figure 3. Employment still remains short of pre-pandemic levels for all groups, including college graduates.
The Labor Market Looks Very Tight
The clearest sign of the tightness of labor markets is the fact that job openings rate in May was 5.9 percent, which is the highest on record—and well above their pre-pandemic value as shown in figure 4. The quits rate in March was also tied for its record high level, potentially due to a combination of increased churn as labor markets normalize and also workers’ confidence in their ability to find new jobs.
At the same time, there were still an unusually high number of unemployed workers so that there were still 1.0 unemployed people for every job opening in May (or 1.3 adjusting for the unusual reduction in participation) as shown in figure 5. Based on this measure, the labor market in May was about as tight as it was in early 2017 when the unemployment rate was around 4.7 percent.
Ultimately the most important way to assess the tightness of labor markets is wages. The last fifteen months have been unusual in that very high unemployment did not result in any slower wage growth for the workers who kept their jobs—instead wage growth continued at a relatively fast rate with the fastest wage growth for the bottom quartile of workers.
Over the last two months wage growth has picked up to an annual rate of 8.1 percent for production and non-supervisory workers. This almost certainly understates true wage growth in the economy because many of the workers rehired have been in lower-wage industries and as they re-enter the jobs numbers they drag down the average. It is impossible to do a full adjustment for this effect without the underlying micro data, but a crude adjustment holds the industry sector shares of total hours worked constant, effectively averaging the growth in wages within each industry sector. This shows that wage grew 1.5 percent in April and May for production and non-supervisory workers, or 9.1 percent at an annual rate, faster than in any pre-pandemic two-month period since the early 1980s. (The two-month wage growth for all private workers was the fastest pre-pandemic growth on record, with data going back to 2006.)
Looking Forward: More Supply, More Demand, but When and How Much?
The most important solution to the challenges in the labor market is time. Time for job matches. Time for the extent of the virus to improve. And time for expanded unemployment benefits to expire or be replaced by more modest increases in the states that have not yet dropped them. The problem at this stage is that it is impossible to tell if time will bring back all 10 million missing jobs or just a subset of them and how long this process will take.
At the same time, all evidence is that demand in the economy remains ample. It is likely that final demand by domestic purchasers is already above its pre-pandemic trend and with healthy balance sheets, continued wage and employment gains, and continued highly expansionary monetary policy it is likely that demand will continue to grow.
Demand outstripping supply can result in higher imports and lower inventories, higher inflation (transitory or possibly permanent), or higher productivity. Time will tell how all of these play out in rectifying the inevitable imbalances the economy is going through as it continues to emerge from the massive dislocation associated with the pandemic.
The data underlying this analysis are available here.