Labor Market is Finally Delivering on the Wage Front

Solid Growth in Jobs and Wages for January

Payroll employment rose by 200,000 in January after being revised lower on net for the last two months of 2017. The result leaves us with a labor market that continues to heal and is finally delivering on the wage front.

Gains were concentrated in construction, which has been lifted by the ongoing need to repair and replace damaged properties in the wake of natural disasters. The fires and mudslides in California have been particularly costly and mostly covered by insurance. This is good news for existing homeowners but will continue to put upward pressure on home prices, which are becoming more of a hurdle for first-time buyers. Millennials have the same dreams of home ownership as previous generations; it has just taken them longer to enter the market.

Job gains in leisure and hospitality were substantial. Food and drinking services were particularly strong, reflecting consumers' renewed ability to allocate more to discretionary spending. We are finally seeing signs of a "feel good" economy emerging with consumers able to kick up their heels again. This is where increases in the minimum wage show up over time, although the increases were smaller than expected in January.

Retail trade jobs increased a bit after being revised lower in December. In-store hiring is slowing and reflects the shift to online shopping, which has reached a critical mass. I would add that, given the poor service I have experienced personally, even from online providers, that the economy has truly hit a tipping point. The best indicator of an economy's strength is the quality of service. We have come a long way from 2013 when a former senior vice president at Morgan Stanley provided the best service I ever received when he helped me to buy my daughter a refrigerator to take to college; she graduates this year. As a labor economist, I am one of the few popping a champagne cork over the slowing speed of people waiting on me.

Average hourly earnings jumped 9 cents to $26.74, up 2.9% from one year ago. That marks the strongest wage growth since 2009, but then wages were decelerating instead of accelerating. The composition of job gains added almost as much as actual wage acceleration to the increases we saw during the month. Unusually cold winter weather meant more high-wage workers could get to work than low-wage workers; some of Florida's tourism industry was temporarily shuttered during the month.

The largest actual jump in wages occurred in financial services, information technology and healthcare. We are also beginning to see an uptick in wages in the professional services sector, which includes new college graduates. The gains for professional hires, however, are still slow relative to the rest of the economy. Everything from labor shortages to a jump in the minimum wage for low-wage workers, including in finance, is boosting those wage gains. Many companies cited the tax cuts as well but the data isn't bearing that out with the exception of finance, a sector where we were already seeing an acceleration well ahead of the announced tax cuts in at the end of 2017. The disappointment is in manufacturing, where wages are decelerating, despite a rebound in hiring. This is structural. Many manufacturing jobs are now low- instead of high-wage jobs. A loss in high-wage vehicle sector jobs will likely continue now that replacement demand associated with recent disasters is abating.

Separately, the unemployment rate held at 4.1%, a 17-year low. Participation in the labor market, however, remained unchanged. Part of the problem is a loss of workers to retirement. We are also continuing to lose prime-aged women. In fact, female participation in the labor force is now lower in the U.S. than in other major developed countries, including Japan. This is a red flag in an otherwise encouraging report. Women's participation in the labor force is one of the best indicators of how evenly growth is distributed. Employers will need to rethink their recruiting strategies to get the most out of available talent going forward.

Bottom Line
The labor market is healing, with wages finally showing signs of picking up along with employment. We need to see those gains sustained and become more widespread. It looks as if we will finally clear that hurdle this year. To paraphrase Jim Morrison of the Doors, we have finally broken through to the other side where labor is becoming scarce and employers have to work to find, retain and train employees. This is new for most employers.

About the author
Diane Swonk Diane Swonk
Chief economist
Twitter: @DianeSwonk

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