The April employment reports released Friday perfectly encapsulated the economic moment: everyone has a job and no one is happy about it because of inflation.
Job growth remains surprisingly strong. Nonfarm payrolls grew by 428,000 jobs, beating the forecast for 380,000. The forecast figure would have been impressive in any economy and the beat even more so. Adding 428,000 workers to payrolls when unemployment is already down to 3.6 percent is truly amazing. Adding workers gets harder when there are fewer workers on the sidelines.
The unemployment rate held steady at 3.6 percent and the number of people counted as unemployed fell by 353,000. Why didn’t falling unemployment bring down the unemployment rate? The rate is calculated as the share of people actively participating in the workforce who are looking for work and cannot find jobs. The labor force, however, contracted by 363,000 in April, resulting in a decline in the workforce participation rate to 62.2 percent from 62.4 percent.
We can only speculate as to why so many people dropped out of the workforce in April. The rise in COVID infections could have played a role. Inflation may also be a factor. It may sound bizarre to say that some people decide not to work because prices are going up; but if you are making less after inflation than you had been, the opportunity cost of not working declines. So falling real wages may be discouraging work.
The fall in participation also poses a problem for Fed Chair Jerome Powell. In his press conference this week, Powell argued that he expected that more workers would be returning to the workforce, which would help cool the inflationary pressures of rising wages. The April figures indicate that there’s a risk that falling real wages could push more works out of the labor market. The April decline was driven by a 204,000 drop in Gen X workers between 45 and 54 years old and an even bigger decline in the number older Gen Z workers, with a 198,000 drop in workers aged 20 to 24 years old. Thank goodness the Millennials are such hard workers (or were so scarred by the 2008 financial crisis and low employment years of the Obama administration that they’ll hang on to whatever job they’ve got.)
There were mixed signals on the wage front. Average hourly earnings increased 0.3 percent compared with March, or 5.5 percent compared with a year earlier. The monthly figure indicates a deceleration compared with February to March, which was revised up from 0.4 percent to 0.5 percent. But at three-tenths, earnings would be rising by less than the expected 0.4 percent rise in the core Consumer Price Index (CPI) for April, so real wages might be declining.
The big numbers for next week will be the CPI and the Producer Price index (PPI). Both are expected to cool from the torrid rates seen in March but not by much. CPI is expected to come in at 8.1 percent, which would be a jaw-dropping figure if we hadn’t been a half of a percentage point higher a month ago. Even if CPI comes in cooler than expected, it is sure to be too hot for comfort.