Employment: Good Job Gains, Better Wages, More Growth

February registered another solid broad-based gain in payrolls. In addition, the unemployment rate fell to the top end of the Fed’s long run range, leaving the data-dependent FOMC on pace to raise rates in June.
Broad-Based Job Gains a Plus for the Economy
Job growth remained solid in February, with employers adding 295,000 jobs. Over the past three months employment gains have now averaged 288,000 jobs—a solid pace consistent with trend growth of 2.5-3.0 percent. Jobs plus wages plus hours indicate a solid gain in consumer spending in 2015, above the pace of 2014. Job gains were recorded in a broad set of sectors, including professional & business services, education & health services, finance, leisure & hospitality and construction (top graph). The gain in manufacturing jobs along with manufacturing hours indicates better industrial production. We expect another 4 percent gain for industrial production in 2015. However, mining sector employment fell 8,000, and that is consistent with the drop in oil prices as that decline is beginning to take a toll on employment in the energy industry.
Aggregate Hours and Employment-Population Ratio: Positives
On a three-month average annualized basis, total hours worked have risen at a 3.7 percent rate, indicating continued improvement in overall economic growth (middle graph). The unemployment rate fell to 5.5 percent while the employment-population ratio remained steady. All of these results indicate broader strength in the overall economy. Unemployment rates for both adult women and men fell in February and are down one percent or more from a year ago. Teen employment is up and the unemployment rate is lower than a year ago. U-6 unemployment is at 11.0 percent and is approaching its long-run average. People employed part-time for economic reasons continue to decline—another signal of longterm improvement in the labor market.
Wages Really Out of Line with Current Conditions?
Although employment made strong gains in the month, average hourly earnings were fairly weak, rising just 0.1 percent in February. Economic fundamentals do not support the view that the normal level of wage growth would be around 3.0-3.5 percent. Workers should earn the marginal product of their output, leading to real wage growth on par with labor productivity. The nominal average hourly earnings series that has received increased attention with the monthly employment report should therefore closely track inflation plus productivity growth. While not a perfect relationship, this held true from the mid-1960s to early 1980s. Since then, however, wage growth has fallen well short of productivity and inflation (bottom chart). Given the poor progress of labor productivity in recent years, averaging around just one percent per year, and stubbornly low inflation, the current rate of wage growth actually looks in line with fundamentals.