The May 2024 Employment Report

Payrolls grew by a solid 206,000 in June-slightly above expectations-and the unemployment rate ticked up to 4.1%. Revisions took payroll gains from April and May down by a cumulative 111,000, such that in the second quarter of the year, payroll gains averaged 177,000 per month.

Other highlights from the report include:

• Yearly wage growth, before inflation, was 3.9%. While we won't have June's inflation rate until next week, May's rate was 3.3%, and we expect that yearly wage growth outpaced price growth in June, as it has for the past 13 months through May, providing more buying power for working Americans.
• Overall labor force participation ticked up slightly, but the overall number, because it includes retirement effects of our aging workforce, is less indicative of the extent to which the persistently strong labor market is pulling in participants. The prime-age LFPR, at 83.7%, is at a 22 year high and slightly above its pre-pandemic level. The rate for prime-age men rose 0.4 percentage points (ppt) in June, taking the rate up to 89.6%. That's tied for the highest prime-age men's LFPR in over a decade. The prime-age women's LFPR fell by 0.2 ppt, but remains historically elevated and is 0.9 ppt above its pre-pandemic level.
• The diffusion index, featured in last month jobs day blog, showed that a solid 59.6% of private industries added jobs in June.

The unemployment rate ticked up to 4.1% in June, up from 3.9% and 4.0% in April and May. Still, 4.1% is an historically low unemployment rate, 7^th percentile of unemployment rates since 1990 and below the CBO's estimate of the unemployment rate at full employment (4.4% in 2024Q2).

Today's report is consistent with a job market that has been cooling, or normalizing, as expected given the extent to which labor demand was outpacing labor supply over much of the current expansion. Our X thread this morning [link] shows the gradual deceleration of the 3-month average payroll gains, and, as noted, the jobless rate has ticked up from 3.9% to 4.1% over the past three months.

To assess the health of the labor market, it is important to contextualize these sorts of observations. Going from overheated to more normal conditions is typically accompanied by moderated job gains, slower nominal wage growth, and ticks up in unemployment. But these developments are still consistent with a stable, solid job market providing robust job and earnings opportunities for working families.

Starting with wage growth, Figure 1 plots nominal, yearly wage growth for low, middle, and higher wage industries. During the pandemic years, the trend for the lowest-wage group in particular was extremely jumpy as large shares of low-wage workers left and then re-entered the labor market. But as that composition effect settled down, the persistently tight labor market delivered strong growth rates for those in low- and middle-wage industries. Although the figure excludes today's data-as we do not yet have the complete wage-by-industry details-we see that the three series are beginning to settle into similar growth rates, all of which have been running ahead of inflation. Furthermore, the series are trending towards the central bank wage-growth target of productivity growth plus target inflation, around 3.5%.

More evidence of stabilization comes from Beveridge curve analysis, or the relationship between job openings and the unemployment rate. The blue dots in Figure 2 show how the curve appeared to shift out during the pandemic, while the vertical series of bright green dots shows a downshift back to the pre-pandemic line, with the dark blue dot denoting the most recent point in May 2024. A notable aspect of this development is that the decline in job openings has clearly not been associated with higher unemployment. That means we've, thus far, been able to achieve labor-market normalization without giving up our persistently low unemployment conditions, an historically unique achievement.

Figure 3 shows a more granular version of this aspect of return-to-normal. It plots the number of vacancies relative to the number of unemployed workers by industry, where 0 on the y-axis is set to the 2019 average for each industry. It shows that most industries are back to the pre-pandemic ratios. However, Government, Education & Health Services, and, to a lesser extent, Manufacturing remain somewhat elevated-indicating tight labor market conditions. For Government as well as Education & Health services, pandemic disruptions have understandably delayed their normalization.

One reason unemployment has ticked up slightly over the past few months is that the rate at which the unemployed move into employment has decelerated slightly, as shown in Figure 4. It shows two measures of this movement: the U->E flow rate (which describes previously unemployed workers who obtain jobs), and the hires rate (which tracks all hires, regardless of origin, as a share of employment, and is derived from the JOLTS survey). All else equal, as these measures drift down, that typically translates into a slower transition out of unemployment, which shows up in today's employment report as a slight increase in median unemployment durations, and in the unemployment insurance accounts as a slightly higher stock of continuing claims.

All of these dynamics are to be expected and all are consistent with a strong, steady, stable job market delivering ongoing opportunities for working Americans. CEA will continue to carefully track their evolution.

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