When a person fails to meet expectations there is reason for disappointment. But the same cannot be said of the US labour market. There is no “right” level of employment growth, so the term “weak” has no meaning when assessing data releases relative to Wall Street estimates.
The consensus on Wall Street begins from the assumption that faster employment growth is always better than slower. Wall Street commentary does not acknowledge that hiring can slow because the labour market is so strong there is a shortage of workers.
The consensus also ignores the possibility that the current slowdown in economic growth does not foretell a recession. Rapidly decelerating from 40mph to 20 feels the same as slowing from 20 to zero (until the very end). In fact, the economy is simply moving down a gear.
Symptoms of strength
Perhaps the best indicator of a strong labour market is that wage growth in the employment placement agency industry is sixth-highest out of the hundreds of sectors tracked by the US Bureau of Labor Statistics. Wages are growing by an average of 16.5% a year and the rate is rising. Headhunters do not fare well in deteriorating labour markets.
The current bull market in the headhunting industry runs completely counter to Wall Street’s argument. When labour is scarce and firms want to increase production, they must pay for someone to beat the bushes for available workers. Based on the supply of short-term unemployed workers, currently at 60-year lows, it is no surprise that headhunter services are in high demand.
The breadth of wage acceleration also points to a robust labour market. In late 2018 wage growth in the service-providing side of the economy began accelerating and has now caught up with the goods-producing side. Wage growth acceleration is broadening, which begets wage growth in yet more sectors as employers fight to retain employees.
When a firm hires a new worker, it is purchasing the skills that worker offers. Wage acceleration spreads across the economy through shortages of skills, not workers. Once a skill is no longer available, an intense bidding contest takes place between employers to maintain production as firms compete over a fixed pool of labour.
Another indication that the slowdown in employment growth is supply-driven is that it has been accompanied by a near-halt to the growth of highly educated workers in the labour force. A glut of college graduates seems to have been used up and the results are showing up in the wage data.
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