OPINION: Labor market off to a strong start in 2023

517,000 jobs added in January as unemployment rate hits historic low

By ELISE GOULD
Senior Economist
Economic Policy Institute

The labor market is off to a strong start this year with 517,000 jobs added in January, an unemployment rate at a historic low of 3.4 percent, and wage growth that continues to decelerate, slowing down to 3.7 percent at an annualized rate (down to 4.4 percent growth over the last year).

Promising gains in the public sector in January (+82k), though that sector still remains significantly below pre-pandemic levels (-482k). While leisure and hospitality still has the largest jobs gap, strong gains in recent months are steadily closing it.

PUBLIC SECTOR EMPLOYMENT GAINS SLOW TO RECOVER
While the latest gains are welcome news, public sector employment gains — notably state and local jobs — have been slow to recover. Private-sector jobs bounced back heartily from fiscal support now up 2.5 percent, but state and local continues to trail, still 2.5 percent below pre-pandemic levels.

Message to the Fed: Wage growth continues to decelerate no matter how it’s measured. These trends are not driving inflation.

LIVING STANDARDS
Understandably, some might find it puzzling that I’d say a slower pace of nominal wage growth is good news. I care about living standards, measured as real wages. When inflation falls faster than wage growth, workers are better off. That’s what happened the second half of 2022.

Not only was job growth in January stronger than anticipated, but the revisions were also larger as well. After benchmarking against UI records, total payroll employment for March 2022 was revised up by 568k jobs. Total establishment survey revisions increased December 2022 jobs by 813k!

January’s annualized monthly wage growth was 3.7 percent, a very non-inflationary number. I’ve said this before and I’ll say it again, BY THIS MEASURE THE FED’S WORK IS DONE. The deceleration over the last year is clear.

INFLATION SLOWING FASTER THAN WAGE GROWTH
Important note! I wouldn’t normally be happy that wage growth is slowing, but the thing here is that inflation is slowing much faster than wage growth is slowing. That means real wages are rising, which is great news (this wasn’t happening in ’21 or the first half of ’22).

If the Fed is determined to restore the two percent inflation that (roughly) prevailed before the covid recession, the best-case scenario is exactly what we’re seeing — nominal wage growth slowing but inflation slowing even faster.

Folks, over the period of slowing nominal wage growth of the last 10 months, the labor market has added 365,000 jobs per month on average, and the unemployment rate is down to 50-year lows. It looks like the economy can have a soft landing, if the Fed doesn’t stand in the way.

And the data revisions folks are talking about today, that show we had 813,000 more jobs in 2022 than we thought we did? ALL of that (and more) was in the private sector. The private sector revisions added 939,000 jobs, while the public sector revisions subtracted 126,000.

State and local governments have gained back less than 2/3rds of what they lost in the spring of 2022. The gap in state and local jobs is a crisis, BUT IT DOESN’T HAVE TO BE. State & local governments can and must use their American Rescue Plan Act (ARPA) funds to raise pay and refill those jobs.