Although the headlines are likely to focus on the big "beat" of monthly employment creation (227,000 new jobs, compared with consensus expectations of 180,000), the January jobs report released Friday is much more complex and nuanced -- both in its messages and implications.
The three main messages:
- Even though the extent of the January beat is tempered by the revision of the previous monthly estimate, the latest report confirms that the U.S. remains among the world's most powerful job creators. After all, January's strong job growth is part of a remarkable run during which more than 15 million jobs have been added. This was partly responsible for pushing the unemployment rate slightly higher (from 4.7 percent to 4.8 percent).
- It is also encouraging that more people are re-entering the labor force. The labor participation rate edged up from 62.7 to 62.9 percent, with a similar increase for the employment-to-population ratio to 59.9 percent.
- Mitigating these two positive factors is renewed weakness in wages. They rose by just 0.1 percent in January, lowering the annual rate to 2.4 percent, a level that is insufficient to make this recovery more inclusive. At this stage of the job recovery, wages would be expected to grow by 3 percent or more.
The three major Implications:
- January's combination of strong job growth and sluggish wages deepens the questions about the functioning of the labor market. At a minimum, it suggests that the usual cyclical relationships are being heavily influenced by structural challenges.
- That means that "enabling measures" (such as tax reform, deregulation and infrastructure spending), while necessary and helpful, are unlikely to be sufficient to significantly improve the outlook for wages and labor participation. A supplementary focus is required with policies that deal more directly with enhancing the functioning of the labor market and making it more inclusive, such as skill acquisition, labor retooling, education reform and minimum-wage legislation.
- Finally, the data lower the probability of a Federal Reserve rate hike in the short term. Specifically, the central bank will read the report as an indication of remaining slack in the labor market, consistent with its hesitations about tightening policy too quickly.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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