What to Expect From the June Jobs Report on Friday

Normally when employment growth is below expectations, we can assume the problem is a lack of demand for workers. That hasn't been the case the last two months. Demand for labor is clearly quite strong, with the official Job Openings measure being at an all-time high. It is clear that the lack of people willing to work (or at least, willing to take the jobs that are on offer) has held back total employment gains. As we look forward to Friday's jobs report, the state of labor supply should be our main focus. Here's what I'm expecting to see. Labor Supply Just as Important as Demand This chart puts the labor supply problem into context, and offers a bit of a warning. It shows the number of job openings per available worker, measured either by the total number of unemployed (blue) or unemployed plus those who are not actively looking but want a job (green). Source: Bureau of Labor Statistics I called out the level of both of these stats from the end of 2017. I picked that date because during calendar 2018, Core PCE was consistently over 2%. That despite the Fed having hiked five times leading up to 2018, and twice more during that year. I have argued all that is needed to get inflation higher is for the labor market to reach 2018 levels of tightness. The ratio of openings to available workers suggests we're already there. The question becomes whether these measures of available workers paint an accurate picture. More on that in a moment. Labor Supply Also Crucial for Earnings This labor supply question isn't just about inflation and the Fed. Rapid wage growth will weigh on margins, as most companies probably won't be able to fully pass that cost on to customers. Further, if there are labor shortages, companies won't be able to produce at full capacity. On a macro-level, the amount of total production in an economy is equal to the total labor supply multiplied by labor productivity. We can't keep making more stuff (and providing more services) unless there are more people to make it. Hence, the economy's total growth capacity is limited if the labor supply peaks at a lower level than pre-pandemic. State of Labor Supply Taken at face value, the evidence is bleak. The total number of people either working or looking for work, which we call the labor force is still 3.6 million below its pre-COVID peak. You'd think with the job market as hot as it is, those 3.6 million people would be quickly finding jobs, or at least starting to look. Unfortunately, that's not what's happening. The total labor force is only up 460,000 so far this year. That's actually slower than the pace in calendar 2019. However you slice it, total labor supply doesn't seem to be in recovery mode. It seems to be plateauing. What Might Be Holding Labor Supply Back? There are some obvious potential reasons why labor supply is growing much slower than we'd expect at this point in the recovery. The most obvious is generous unemployment benefits. Depending on individual circumstances, out-of-work people might be getting extra unemployment payments, might be able to stay on longer, or might be eligible for reasons they usually would not be. It is safe to say this is having some impact on people's willingness to work, although we can't tell exactly how strong this effect is just yet. We won't get much evidence one way or the other from Friday's employment report. Although 25 states have announced the extra $300/week payments will be ending early in that state, none of these went into effect before the survey period for this jobs report. Maybe some people decided to look for work in earnest knowing the extra payments were about to run out, but I'd assume not too many. If you've waited this long, what's another couple weeks? Nationwide, this program ends in September, so we might not know the full effect of these supplemental payments until the October jobs report. We do have some hard evidence from another Labor Department report showing continuing unemployment claims from pandemic-related programs. There are two main ones. The Pandemic Unemployment Assistance program is aimed at people who are directly impacted by COVID and wouldn't normally be eligible for unemployment. Use of this program has declined by about 25% since March (from about 8 million to about 6 million). However, the Pandemic Emergency Unemployment Compensation (PEUC) program, which mainly just extends the time period where one can claim unemployment, has been steady between 5 million and 5.2 million since April. I'd say the lack of change in this second program is decent evidence that generous unemployment benefits are having some effect on people's willingness to work. Like the extra $300/week payments, PEUC expires in September. That being said, I think too many people are taking it for granted that the end of extra UI payments will solve all the labor supply problems. People currently on UI might not intend on coming back to work at all, perhaps because they can retire or because they were earning a second income for their household that is no longer needed. Many people were earning wages that were only marginally higher than the cost of child care. Maybe the pandemic convinced some people that it wasn't worth it. There's also a measurement problem here. The vast majority of people collecting unemployment insurance should count as in the labor force but unemployed. While the form you fill out for unemployment claim isn't directly linked to the BLS employment survey, presumably most people answer that they are looking for work in both cases. Hence, while it is likely that these UI programs are resulting in some people not looking for work as aggressively as they might otherwise, it probably doesn't explain labor force dropouts. Top-Line Jobs Number Secondary As I said above, Friday's employment report probably can't be strong enough to put to rest worries about labor supply. However, I'd really like to see a strong rebound in the total labor force from May's 53,000 decline. In fact, a beat on the top-line number of jobs added but a mediocre labor supply number is a bearish sign for risk assets as well as rates. If the size of the labor force doesn't start growing soon, it suggests this cycle will be shorter than what is currently priced in. I won't panic if it doesn't happen this month, but we need to see evidence of an acceleration soon.

What to Expect From the June Jobs Report on Friday

However you slice it, total labor supply doesn't seem to be in recovery mode.

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