Sreejith Balasubramanian | 13 Jun, 2021
Imported tightening is a possible risk to the Reserve Bank of Indias
(RBI) current accommodative monetary policy stance, but it is likely
The US Fed's new framework places high weightage
on equitable job growth, does not link monetary policy action to only a
headline employment number and thus focuses much more on the details of
the labour market.
The Fed adopted this based on its learnings
from the later stages of the US economic expansion in 2018-19, when a
strong job market co-existed without an unwelcome increase in inflation,
and through its Fed Listens outreach programme, where it directly
engaged with the representatives of low and moderate income communities,
minority groups, etc.
The US labour market thus warrants being
closely tracked to understand its structure, the hit from the Covid-19
pandemic, where it is currently headed, factors which are playing out
and those to watch out for. Monitoring these helps gauge the likely
reaction of the Fed and the market, and thus the risk to RBI's monetary
Average unemployment rate fell to 3.9 per cent and 3.7
per cent in 2018 and 2019, respectively, from 4.4 per cent in 2017.
Importantly, Labour Force Participation Rate (LFPR) increased from
September 2018 to February 2020, after being flat for more than two
This was even better for the prime-age category (25-54
years) LFPR, which was already on an upward trajectory from 2016 and
picked up further in 2019. Average hourly earnings of private non-farm
employees grew by 3 per cent and 3.3 per cent y/y in 2018 and 2019,
respectively, after 2.6 per cent in 2016 and 2017.
as the Fed had reiterated then, benefits of the economic expansion had
started percolating to all parts of the society. Unemployment rate for
various ethnic groups and races was falling since 2011 but the gap among
them had become narrower in 2018-19.
All this while core PCE
(Personal Consumption Expenditures) price growth (Fed's preferred
inflation gauge) averaged 1.7 per cent in 2017, 2 per cent in 2018 and
1.7 per cent in 2019.
Labour force: Short-term factors delaying recovery?
after the dip in April 2020 and the immediate partial recovery till
June 2020, has been moving sideways for almost a year now. Dissecting
LFPR by age-group, the prime-age category has been flat for a year
(because 35-54 has been flat although 25-34 has been recovering) while
55+ has fallen even below its April 2020 low.
The number of
people ï¿½not in the labour force but want a job' is also 1.6 million
higher than the pre-pandemic level and has remained so for a while now.
The main factors which could possibly explain this are short-term in
nature -- perceived health risks and childcare requirements as schools
haven't fully reopened.
It could also indirectly depend on
spouse's employment and UI (Unemployment Insurance) benefit status. If
this is indeed the case, we could expect the LFPR to recover further
once these factors ebb over the next few months.
Employment: Slow recovery?
employment level is currently 7.6 million below the pre-pandemic level.
If we use the extrapolated pre-pandemic trend as reference, the
shortfall is even higher. Payroll addition in recent months was below
consensus expectations despite the economy gradually reopening from
The possible reasons are the heavy UI benefits, intra and
inter-sector compositional shifts in jobs (as people's preference could
have changed), perceived health risks, child care needs and possibly
even supply-side constraints which could dampen the demand for labour in
By sector, Leisure & Hospitality, Trade,
Transportation & Utilities, Education & Health services were the
top three job losers when the pandemic hit.
Job addition in
services, initially lagging, has now started to increase. Leisure &
Hospitality, with lower wages and thus likely benefiting more from UI,
has led the way here which raises the question of how big a factor UI
benefits really are in discouraging workers from looking for jobs.
while manufacturing and the less contact-intensive services have
recovered to 96 per cent + of pre-pandemic employment levels,
contact-intensive sectors have more to catch up.
Unemployment: Long-term damage and UI benefits
rate was 3.5 per cent in February 2020, 14.8 per cent in April 2020 and
5.8 per cent in May 2021. Given it is defined as the ratio of the level
of unemployment to labour force, change in latter impacts assessment.
Thus, employment level or the employment-population ratio could be
better indicators for now.
However, rise in the number
unemployed for 27+ weeks and the absence of a meaningful drop in
permanent job losers warrant scrutiny. This possibly suggests -- 1) if
one is unemployed for long, it is difficult to find a job (they could
thus fall out of the labour force) and the number of such people are
rising; 2) the drop in unemployment is not primarily driven by the fall
in number of permanent job losers.
Re-entrants to the labour
force also have increased unemployment. This is a positive as part of it
could be those who were temporarily out of the labour force but wanted a
job and thus still have a good chance of finding employment.
weekly initial filings for UI has been falling, total number of
continued claims (under various unemployment compensation programmes) is
still above 15 million. While the pandemic-related additional federal
UI-benefits end on September 6, 2021, some states have opted for an
early exit. It is to be seen whether this increases the pace of job
Employee earnings: Base and composition effects
April 2020-May 2020, when the pandemic hit, headline average hourly
employee earnings actually picked up because employment of lower-wage
(service) workers were disproportionately hit and they fell out of the
This base effect now works the opposite way
to dampen the average as lower-wage service job additions are
recovering. Thus, it is important to look at the sectoral trends.
Increase in weekly hours worked, particularly among employees retained
in private service jobs, also helped increase weekly earnings. Hours
worked in manufacturing are close to pre-pandemic levels.
highest cumulative rise in weekly earnings since March 2020 is in
financial activities, professional & business services. Increase in
earnings was initially more towards manufacturing and financial
activities, while it now also includes leisure & hospitality,
Given that job additions are likely to pick
up as the economy reopens progressively, UI benefits cease and if
factors which temporarily keep workers off the labour force abate, could
services (particularly the contact-intensive ones) see some more wage
pressure before it starts easing?
Sectoral trends are to be watched too for any earnings pressure from pandemic-induced changes in job and wage preferences.
Rise in job openings and quits: Job seekers' market for the short term?
openings and quits have picked up while layoffs are now below
pre-pandemic levels, as per JOLTS (Job Openings and Labor Turnover
Survey). Anecdotal evidence suggests difficulty in hiring and offers of
higher wages, particularly in construction and food & beverages
Thus, there is difficulty in both filling open
positions and retaining employees. Could this point to workers having
more job options (or having more confidence in finding jobs), time to
choose till UI benefits expire and a change in job preferences?
phenomenon also seems to be quite broad-based across sectors, with only
education & health services witnessing a recent fall in
job-openings-to-hires ratio. Quits, only in financial services, have
stayed flat recently but this is likely given the strong job additions
and rise in weekly earnings during May 2020 to Feb 2021.
Putting it all together
force continues to be well below pre-pandemic levels, job addition has
been slower than anticipated (although service jobs are making a
comeback), continued UI benefit claims are still high while new ones
have been falling and earnings in contact-intensive services have
started to rise. However, both job openings and quits have picked up
Lower labour demand from supply-constraints (to
meet the sudden surge in demand from economic reopening) doesn't seem to
be a major contributor to labour shortage as job openings are rising.
pandemic-related additional UI benefits will expire in early September,
perceived health risks will further abate if infections don't rise and
vaccinations progress, and child care requirements will abate if schools
and child-care centers reopen as scheduled. The tailwind these factors
offer for job additions, the impact on wages and the inclusiveness of
all this across sectors are to be closely watched.
additions rise as these factors abate, it should help dampen aggregate
wage pressures, ceteris paribus. However, divergence among sectors on
the strength, timing and duration of wage pressures will be important to
track as more clarity emerges on the job-composition shifts caused by
the pandemic (e.g. change in requirements as businesses adapt,
reluctance of labour to get back to similar jobs as before, whether
these are short or medium-term trends, skill mismatches it could create,
etc.). This will have implications for inflation as well.
interplay of all the above factors is likely to have created the
dichotomy that exists within the labour market today -- high number of
job openings and quits which typically indicate a tight labour market,
but the fact remains that the economy is still 7.6 million short of its
pre-pandemic non-farm employment level and recent job additions have
been below expectations.
Will this widen before it gets better?
If so, will the rise in wages till the likely pick up in job additions
be stronger and will this prove sticky? The next few months will thus be
crucial. The Fed, under its new policy framework, will also be watching
very closely whether the labour market recovery is equitable.
(Source for all figures: CEIC, US Bureau of Labor Statistics (BLS), IDFC MF Research)
(Sreejith Balasubramanian is Economist-Fund Management, IDFC AMC. The views expressed are personal)