The Employment Situation in September – Solid, But Still Working On It

The Bureau of Labor Statistics (BLS) reported payroll employment rose by 156 thousand in September and the unemployment rate inched up to 5.0%. Payrolls for the prior two months were revised in opposite directions with a net reduction of seven thousand.

Payroll growth edged down and the unemployment rate edged up but the employment situation in September is better than those headline numbers. Monthly payroll gains are notoriously volatile and a twelve month average shows payroll gains still hovering above 200 thousand, although slower than in 2014 and 2015. These gains have been more than enough to absorb the meager labor force growth (from the household survey) in recent years, average monthly gains of 113 thousand and 126 thousand in 2014 and 2015, respectively. Hence the declining unemployment rate.

The strength of September’s report is the large gain in the labor force, 444 thousand, pushing up the unemployment rate and the labor force participation rate. Monthly gains in the labor force, also notoriously volatile, have averaged 206 thousand in 2016 so far. An expanding labor force and rising participation rate signal ongoing strength and progress in reducing the “hidden” labor supply of workers marginally attached to the labor force. These workers are ready and willing to work, have looked for work in the preceding 12 months, but not in the most recent 4 weeks covered by the household survey and thus, not included in the 5.0% headline unemployment rate.

Further reductions in this still elevated pool of workers will also contribute to accelerating earnings growth. Growth in average hourly earnings has trended upward since hitting bottom in late 2012, reaching 2.6% in September, signaling further tightening in the labor market. Growth in earnings has accelerated with the declining headline unemployment rate but the hidden labor supply is keeping downward pressure on earnings and inhibiting stronger gains, as high as 4.0% in previous expansions.

Overall, the labor market recovery is on solid footing, but not quite complete.

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