NFP Review: Strong Payrolls, But No Wage Acceleration

Summary

• Once again, the NFP release showed a combination of high employment growth, low unemployment, and no nominal wage acceleration.
• Two key factors are likely restraining wage growth. First, disinflation has made stable wage growth consistent with an increase in labour income share.
• Second is compositional effects. Low-skill wages are rising faster than high-skill, but employment growth of low-skill workers has been slower than that of high-skill workers. 
• This could reflect lower participation of low-skill workers as well as technological change and lower demand for skilled workers, as suggested by high IT capex.
• High capex spending could also have raised worker productivity, which would explain why labour demand remains so strong.

Market Implications

• Moderate wage growth could give the Fed further cover to delay rate hikes.

Another Bumper NFP

March nonfarm payrolls (NFP) at 339,000 was well above expectations of 195,000. In addition, the past two months’ NFP were revised up by 93,000.

Employment growth has been stable at 2.7% YoY for the past three months, though the long-term trend remains on a downward path from the unsustainable highs of the pandemic recovery (Chart 1). 

By contrast with the payroll data, household survey employment contracted by 310,000. This is largely due to definitional differences: the payroll data measures businesses’ demand for labour while the household survey measures the employment status of the workforce. The payroll survey has a bigger sample size than the household survey and tends to be less noisy.

Due to the decline in household employment, unemployment rose by 20bp to 3.7% but remains near its 50-year low (Chart 2).

In addition, participation did not increase, though it remained at the highest level post-pandemic and only about 0.75% below pre-pandemic highs. Prime-age participation rose further to above pre-pandemic highs (Chart 3). This highlights that the decline in participation was mainly with older workers, who are unlikely to re-join the workforce.

Overheating, But No Wage Growth

Despite the tightness of the labour market, wage growth slowed to 4.3% YoY from 4.4% YoY in April. This could reflect two main factors.

First is disinflation. Average wages have been slowly declining but by less than the CPI. As a result, real wages have been rising.

The gains made by workers are shown by an increase in the income share of labour and a decrease in that of corporate profits (Chart 5). In sum, disinflation is allowing workers to increase their income share with stale wage growth.

Second is a compositional effect. Since 2018, wages of production and non-supervisory workers have been rising faster than those of supervisory workers, reversing decades of widening inequality (Chart 6). This trend has continued during the pandemic (see Atlanta Fed Wage tracker and this academic paper).

Meanwhile, the employment growth of the workers with the faster wage growth, i.e., production and non-supervisory workers (hereafter ‘low skill’), has been slower than that of supervisory workers (‘high skill’) (Chart 7). 

This could reflect that the participation rates of more educated workers, who are more likely to be in supervisory positions, have recovered faster than those of less educated workers, who are more likely to be in the production and non-supervisory capacity (Chart 8).

In addition, demand for high-skill workers could have weakened due to technological changes. The pandemic saw an increase in IT investments that does not usually happen during a recession (Chart 8). More broadly, strong capex could have increased worker productivity and contributed to the strong demand for labour.

Market Consequences

The combination of strong NFP prints and no acceleration in wage growth could persist and provide ammunition to the doves on the FOMC. As a result, even if, as I expect, inflation does not slow over the remainder of 2023, the Fed may limit itself to only a couple more hikes.

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed, the IMF, and the World Bank. She joined Macro Hive soon after its inception.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)