Job growth in 2014 best in five years. What’s next?

Economics professor Leslie Stratton weighs in on 12-month jobs report

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The U.S. Department of Labor’s jobs report for December and 2014 as a whole revealed continued economic growth and signaled that employers plan to continue hiring. Will a wage increase follow?

Leslie Stratton, Ph.D., professor of economics in the VCU School of Business, discusses the latest report and what it means for workers.

What's important about the jobs report? Can we expect more of the same? What does the report say about the state of the economy?

Overall the jobs report was very good news. The unemployment rate went down for the month and clearly fell significantly over the course of the year. Some of the decrease in the unemployment rate in December is the result of a decrease in the number of individuals in the labor force — which may mean that some of the unemployed quit looking (left the labor force). However, over the year as a whole, the labor force participation rate was quite stable, declining by 0.3 percentage points over the year and remaining flat from March through December. By comparison, in 2013 the labor force participation rate fell by 0.9 percentage points, raising more serious concerns about the nature of the decline in the unemployment rate in 2013.

Long-term unemployment is still high at 2.8 million but that is down by 1.1 million from last year. The fraction of unemployed who have been unemployed long term — more than 26 weeks — is still high at an average of 33.4 percent for the year, but that average was 37.6 percent in 2013 and 43.8 percent in 2011. In 2006 and 2007 the average was 17.6 percent and in 2000 it was 11.4 percent, so there is still room for improvement but the drop is substantial and significant. Of course it would be nice to know how these 1.1 million left the ranks of the unemployed — did they give up or retire or find a job? That information is not readily available. Interestingly, labor force participation rates for those 55 and over have been increasing, not decreasing, over time.

The information from the survey of employers more or less confirms these findings — employment is up. Not surprisingly, employment in health care and professional services rose, but so did employment in manufacturing — more so over 2014 than in 2013 — and construction. Public sector employment rose for the first time since 2008, though federal employment is still falling.

Average weekly hours are also rising, which should bode well for future hiring. Employers first tend to increase hours worked, and only after they see a persistent increase in demand hire more workers.

Can we expect wages to increase next?

The news on wages is not as good. Point estimates show wages fell in December but the change from October to December was still positive. Private sector production workers saw wage increases in December. However, as the labor market tightens, wages should rise. There was an article in the Money section of the Richmond Times-Dispatch this week about a trucking company in Chesterfield that has had to turn away business and increase wages significantly in order to hold on to and hire more workers. Another news article reported that Aetna insurance was raising worker wages. Increased demand for products will necessitate increased hiring and if the pool of unemployed and underemployed workers continues to shrink, wages will have to rise to attract more people into the labor force.

News that wages have not risen much may be a bit discouraging for workers, but is good news for firms in at least two ways. First, it means that firm costs are not rising as rapidly as they might and, second, it suggests that the Fed will not act as quickly to increase interest rates — the cost of borrowing money.

Rising wages could serve as an advance indicator of rising prices and hence inflation. With the unemployment rate approaching Fed target levels, the Fed is under increasing pressure to tighten the money supply to keep inflation at bay. In the face of stable wages, the Fed can maintain its current policy. However monetary policy takes a long time to affect price levels so the Fed will not want to delay action till after prices start rising.

What is the outlook for 2015 and beyond?

The key concern for 2015 is probably how the rest of the world is doing. There have been several headlines about how the U.S. will pull the rest of the world along, but honestly that is not possible long term. We need company. What happens in Europe and China and South America will affect how well our economy does in 2015.

 

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