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Wages Surge as Unemployment Falls: Record 2021 Job Gains

RFP
Payroll employment rose only 199,000 in December after being revised up for both October and November. Employment for the year came in at a record breaking 6.4 million jobs in 2021 after falling a record 9.4 million jobs in 2020. We are still 3.4 million jobs from the peak in February 2020.

Private sector payrolls increased 211,000 in December, well below expectations, but were again revised up for October and November. The public sector continued to shed jobs, notably in local education where staffing shortages are already acute. Gains in the private sector were broad-based. The largest gains were in food services in response to a return of holiday celebrations ahead of the Omicron outbreak. Next up were gains in manufacturing and construction. It is notable that gains in the construction sector were concentrated in commercial real estate as many firms readied offices for a hybrid return to work in January, which has now been delayed.

Average hourly earnings surged 0.6% and jumped 4.7% from a year ago. Gains were broad-based but the largest increase was in low-wage jobs. The slowdown in employment and surge in wages, notably among low-wage workers, affirms the Federal Reserve’s view that the labor market has reached full employment despite the shortfall from February 2020. Average hours worked remained unchanged at 34.7 hours per week. That is up from 34.4 hours we averaged in February 2020, which underscores labor market tightness as opposed to slack. Those of us who are working are now working more hours per week.

Separately, the unemployment rates plummeted to 3.9%, the lowest level since the onset of the pandemic and close to the 3.5% rate we saw in February 2020. Participation in the labor market held at 61.9% in December, which is an improvement from earlier in the recovery but still down substantially from pre-pandemic levels. In February 2020, we hit a cyclical peak in labor force participation of 63.1%. A surge in retirements, childcare problems and long COVID have all dampened participation in the current recovery. Black and Hispanic women increased their participation in the labor market but remained well below pre-pandemic levels. Men lost ground over the month.

Those who were forced to work part-time for economic reasons decreased while the number of multiple job holders picked up. The former is good news, the latter is bad news in that higher inflation has eroded some of the stellar wage gains we have seen among low-paid jobs.

Today’s data affirms the Federal Reserve’s conclusion that the labor market has recovered despite the shortfall in jobs since February 2020. The pandemic constrained the supply of labor - those actively seeking work - while the shift to working from home, spending online and massive infusions of fiscal stimulus juiced demand. We have never seen anything like what we are seeing today. The gap between job openings and those seeking work has skyrocketed and is threatening to trigger a more entrenched surge in inflation in 2022.

Bottom Line
The December shortfall in employment should be seen as more reflective of labor shortages than a slowdown in hiring given the drop in unemployment and surge in wages. That said, those gains could be rapidly reversed in January in response to the spread of Omicron. Acute labor shortages due to the sheer number of workers out sick have already begun to close restaurants, fast-food establishments, theaters and government offices. Schools are also struggling to stay open. Workers at the lowest end of the wage strata will be hit hardest by the loss in pay triggered by those shutdowns.

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