Cue much worry, an assumption that this represents a demand problem (employers hiring less) and a round of downward revisions to GDP forecasts. But what if this is not a demand problem but (as Moneyweek has been saying for some time) a supply problem?
A new analysis by Brian Pellegrini, of Intertemporal Economics mentioned in the Halkin Letter, sheds some light on the issue. He notes that the unemployment rate for low-skilled service occupations (eg, food service) has dropped two percentage points since early 2016 to stand well below its 2007 level. The employment cost index for this occupational group now “sports a 4% inflation rate, up from 1.7% three years ago”.
There was a reasonable supply of workers into this area from three pools of labour supply – involuntary part-time workers, temporary workers and mature non-participants who want a job. These all appear to have been exhausted. After over a year of very fast employment growth, perhaps there is no one left to hire?
The supply of graduates is about to begin contracting
Things look a little different in the more educated “management, professional and related” segment. Here, the unemployment rate has barely fallen since 2016 and there has been only small upward trend in employment cost inflation, from 2% to 2.4%. However that may be on the edge of change.
As Halkin point out, one of the most important sources of labour supply over the past two years has been newly-graduated international students, almost all of whom can stay to work for three years without further approval due to a visa programme. However, the growth rate of enrolled foreign students slowed rapidly between 2015 and 2017.
More interesting, however, is Pellegrini’s view that the US has just seen “peak graduation.” There was a surge in enrolment in undergraduate programmes over the course of the 2000s. But the “strength of the labour market during the “teens” has resulted in declining enrolment” – and on Pellegrini’s “rough method” in 2018 being the peak graduation year for the foreseeable future.”
The supply of college degree holders is about to begin contracting, something that suggests that wage growth for high-skill workers in 2019 will experience the same acceleration low-skill workers experienced in 2018.
One full employment signal to keep an eye on? Wages in the childcare industry (which start to rise as more people return to work). They have been rising sharply in the US over the last year.
It’s a similar picture in the UK and Europe
This kind of thing isn’t just happening in the US. It is everywhere. In the UK you will hear endless complaints about the difficulty of getting workers with the explanation for the fact that pay (excluding bonuses) was up 3.4% in April (inflation is around 2%) usually being Brexit.
For a better explanation however it is worth looking at numbers from Poland and Romania. In Romania, wage growth is as ING puts it “super strong”. Think 25% plus in the public sector, 12% in the manufacturing sector and 15% ish over all.
In Poland, some 50% of companies are reporting recruitment difficulties and, just as in the US, employment numbers came in lower than expected in June. Not because of “sentiment deterioration” says ING but because of the shortage of people to hire.
Business sector wages were up 7.7% year on year in May. Look at those numbers and you will see that there is no longer a particularly compelling case for workers from those countries to disrupt their lives and shift their families around the place to do rubbish work elsewhere in the EU when there are good jobs – and increasingly well paid ones at that – at home.
That’s why you will hear the same complaints about the lack of skilled and unskilled workers in Germany and France as you do here. It’s also why, in what seems like an age of near deflation, we should be thinking more about the impact of wage inflation – and probably why the US Federal Reserve declined to cut rates at yesterday’s meeting. They don’t get everything right (understatement..) but maybe they are learning to recognise a super strong labour market when they see one.