The Bureau of Labor Statistics (BLS) released its monthly report on the Employment Situation for May today. The report shows that the labor market is now in a steady pattern of slow growth, with little change from previous months. The headline numbers of the report show that the economy added 390,000 new jobs, slightly higher than expectations, and the unemployment rate remained steady at 3.6 percent. Moreover, wage growth remained steady, increasing by 0.3 percent over April and 5.2 percent over the past 12 months. Finally, revisions to job growth in the previous two months were small with March employment being revised down by 30,000 jobs and April employment being revised up by 8,000 jobs.
Despite little change in the overall picture, the report provides signs that the economy is continuing to recover from the pandemic. Given that the economy is continuing to have strong job growth while the number of unemployed workers remains nearly constant at 6 million, the growth in jobs is coming from workers returning to the labor market after the pandemic. Indeed, the report found that 330,000 workers entered the labor force in May, accounting for nearly all of the employment gains. This trend will need to continue for the job market to complete a full recovery from the pandemic as the labor force participation rate is still about one percent below its pre-pandemic level.
The BLS also released the Job Opening and Labor Turnover Survey (JOLTS) on Wednesday, showing that the number of job openings declined slightly from its all-time high to 11.4 million. This shows that the labor market remains very tight with nearly two open jobs for each unemployed worker. While this tight labor market creates a challenging environment for firms to hire and retain workers, the wage growth from a tight labor market is not the main factor generating the high inflation that we are seeing in the economy. First, a strong labor market where firms’ strong demand for labor bids up wages is a mechanism that generates real wage gains for workers, not inflation. Second, the main factors driving prices higher are the large increase in the money supply generated by stimulus payments during the pandemic and supply chain issues caused by the large shift in consumer behavior towards the purchase of goods from services (and now the current reversal of that trend). Instead of observed wage growth driving continued inflation, the more likely process is that inflation and the tight labor market are both important factors in understanding the growth in average wages observed in the data.
