The Bureau of Labor Statistics (BLS) reported payroll employment rose by 156 thousand in December and revisions to estimates for the prior two months were mixed but added a net 19 thousand. The unemployment rate rose to 4.7% from 4.6% in November, an increase that barely escaped rounding error magnitude. Average hourly earnings rose 2.9% over the year.
A broader measure of underutilization in the labor market, the U-6 unemployment rate, captures part-time workers who would prefer to work full-time, and marginally attached workers (those who have looked for work in the last 12 months, but not the last 4 weeks), edged down to 9.2%. The pool of involuntary part-time workers declined further, while the number of workers marginally attached to the labor force appears to have leveled off in 2016.
The spread between the headline unemployment rate and the U-6 rate has slipped to 4.5 percentage points. This spread has hovered between 3 and 5 percentage points during periods of high and low unemployment since 1985, but climbed to a peak of 7 percentage points during the Great Recession when the headline rate peaked at 10%. The decline in the U-6 rate and the spread dropping below 5% signal ongoing progress in reducing the hidden underutilization in the labor market.
Overall, despite modestly lower than expected payroll employment growth, this is a solid report. The labor force expanded, pushing the unemployment rate up slightly, but in a good way. It remains below 5%, a signal of labor market strength. Accelerating earnings growth indicates the labor market, both seen and hidden, is tightening, with the prospect of luring back discouraged workers and expanding hours for the underemployed.