The March Labor Market: Same Old Trends

April 9, 2007 – U.S. payroll employment (released Friday) rose by 180K in March (Chart 1) after a revised 113K February increase (originally +97K). Revisions added a total of 32K to the prior two months’ payroll growth.

Chart 1. Change in payroll employment. Monthly and 3-month moving average. January 2000 through March 2007.

All of the acceleration in March job growth can be blamed on weather-related volatility in construction hiring. Construction payrolls rebounded by 56K in March, roughly reversing February’s 61K decline (Chart 2).

Chart 2. Change in construction payrolls. Monthly and 3-month moving average. January 2000 through March 2007.

Payroll growth averaged 152K per month for the three months through March (Chart 3). This three-month trend has been fluctuating in a moderate-growth range (150K to 202K) for the last nine months – neither strong enough nor weak enough to provoke any changes in U.S. monetary policy.

Chart 3. Change in payroll employment. 3-month moving average. January 1987 through March 2007.

The unemployment rate was essentially unchanged in March, edging down by 0.1 percentage point to 4.4% (Chart 4). The unemployment rate has been steady at about 4.5% since September last year. That’s about a half percentage point below the Congressional Budget Office’s estimate of its “full employment” level, suggesting a relatively tight labor supply.

Chart 4. The unemployment rate: actual versus 'full employment'. January 1987 through March 2007.

This relatively low unemployment rate should help to keep FOMC members worried about the economy’s inflation risks.

Average hourly earnings rose by 4% in March, compared to the same month last year (Chart 5). This twelve-month trend in nominal earnings growth has been running at about 4% since last April.

Chart 5. Nominal and real average hourly earnings. Year-ago percent change. January 1987 to date.

Whether this relatively strong trend in earnings growth actually poses an inflation threat, or not, depends in part on the behavior of other labor compensation costs, as well as on labor productivity growth. Further, as Fed Chairman Bernanke argued (again) in March, unusually high profit margins suggest that firms can currently afford to pay their workers more compensation without raising their prices.

In the longer-term, the FOMC is counting on a “moderate” pace of real economic growth to gradually reduce the economy’s inflationary pressures. The relatively subdued trend in payroll job growth through March should reinforce that expectation.

Bottom line: Some weather-driven volatility, but underlying labor-market trends held steady through March. The outlook continues to favor no change in U.S. monetary policy.

Suzanne Rizzo

Sources:

U.S. Department of Labor, Bureau of Labor Statistics (http://www.bls.gov) - payroll employment, the unemployment rate and average hourly earnings.
The Congressional Budget Office (http://www.cbo.gov) - the “full employment” unemployment rate (also known as the “NAIRU” or the “natural” rate of unemployment).
U.S. Department of Commerce, Bureau of Economic Analysis (http://www.bea.gov) – the chained price index for personal consumption expenditures (the chained PCE price index), used to calculate real average hourly earnings.
Board of Governors of the Federal Reserve System (http://www.federalreserve.gov) - Fed Chairman Bernanke’s March 28, 2007 testimony to the Congressional Joint Economic Committee on the economic outlook.
National Bureau of Economic Research (http://www.nber.org) - recession dates.