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Tags: labor market | jobs | higher wages | pay

Tight Labor Market Forcing Firms to Pay Higher Wages

Tight Labor Market Forcing Firms to Pay Higher Wages

(Dollar Photo Club)

Joel L. Naroff By Friday, 06 January 2017 01:06 PM EST Current | Bio | Archive

  • INDICATOR: December Employment Report and November Trade Deficit
  • KEY DATA: Payrolls: +156,000; Private Sector: 144,000; Revisions: +19,000; Unemployment Rate: 4.7% (up from 4.6%): Wages: +0.4%/ Trade Deficit: $45.2 billion ($2.9 billion wider)
  • IN A NUTSHELL: “The tight labor market may be slowing job gains but it is also forcing firms to pay higher wages.”

WHAT IT MEANS: The economy ended 2016 pretty much as expected: Job gains that made few happy but were about as good as can be expected. Yes, the number of new positions added in December was not nearly as much as expected, but then again, the previous two months were revised upward by enough to put the total gains at consensus.

The percentage of industries showing increases rose, meaning that despite fewer jobs being added, the hiring was more broadly based. The health care sector continues to expand like crazy (the ACA needs to be repealed quickly so that doesn’t continue) and while we may not have been shopping at Sears or Macy’s, we still went out to eat.

Restaurant employment surged once again. Despite all the woeful stories coming from statehouses, state and local governments are hiring and it is not just educators. What I really liked was the sharp rise in manufacturing payrolls. The Institute for Supply Management has been saying that firms are hiring again and the government has finally found that trend. The weak links were general merchandisers, temporary help service firms, accounting companies and, strangely, the motion picture industry.

On the unemployment front, the rate rose a tick, but that was expected given the outsized decline in November. The labor force expanded and the participation rate was stable. The real (or really dumb) unemployment rate, which adds in part-timers for economic reasons and discouraged workers, declined to its lowest level since April 2008. Given businesses desires to hire more part-timers, this rate is nearing its likely bottom.

But the best news in the report had to do with wages, which rose sharply. The 2.9% increase over the year was the fastest since May 2009. We still have a way to go before way gains are strong, but we are getting there.

As for trade, the deficit widened sharply in November. Imports were up, led by increases in crude (higher prices helped) and food. Meanwhile, exports declined for the second consecutive month. The stronger dollar is not helping. Even adjusting for prices, the deficit widened, meaning the foreign sector might have restrained growth during the fourth quarter.

MARKETS AND FED POLICY IMPLICATIONS: With the inauguration just two weeks away, the economic data may be taking a back seat to politics. But discounting the numbers is risky since the new administration’s economic policies will work or not work based on where we are. Cutting taxes early in the Obama administration was truly dumb as firms were more worried about survival than hiring or investing. But when the economy is moving forward, tax cuts could work, depending upon their structure. In contrast, when unemployment is high, once the economy gets going, it is easier to hire workers than when there are few people looking for work – as is the case now. The labor force grew at the fastest rate in a decade, an indication that people are piling back into the workforce. Still, the unemployment rate declined. Going to 3.5 or 5 million new jobs per year, as some politicians have said is possible, would require a the labor force surge the likes of which we haven’t seen since the boomers were coming of age. Instead, expansionary fiscal policy will likely add somewhat to growth, but even more to wages. How businesses handle those added costs will determine the inflation rate and how fast the Fed actually raises rates. In other words, 2017 should be really exciting in oh, so many ways. 

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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The tight labor market may be slowing job gains but it is also forcing firms to pay higher wages.
labor market, jobs, higher wages, pay
Friday, 06 January 2017 01:06 PM
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