March Payrolls: An Uneasy Equilibrium
March payrolls growth accelerated, but the unemployment rate went up slightly despite an improved job-finding rate. Wage growth remains sticky above trend.
Today’s release of the March Employment Situation report showed an acceleration in payrolls growth, but the unemployment rate ticked up again as job-exits have been gradually moving higher over the past couple of months. Hourly wage growth remains higher than the 2% inflation pace - similar to what we have seen in previous reports. Payrolls growth trends, however, can’t keep up with a still elevated breakeven pace, although the latter should come down later in the year as population growth slows.
Key takeaways:
Payrolls growth accelerated in March, but near-term trends fall short of the breakeven pace needed to keep the unemployment rate constant at current levels based on higher population projections.
The unemployment rate increased to 4.2% as the labor force participation rate increased to 62.5%.
The job-finding rate improved over the month to 48% with smoothed trends at similar levels. The unemployment rate consistent with recent job-separation and job-finding rates decreased and smoothed trends suggest that in the near term the unemployment rate will likely remain stable around 4.2%.
Wage growth in composition-adjusted average hourly earnings remains elevated at paces inconsistent with the 2% inflation target.
The Fed is confronted with a very uncertain outlook owing to the Trump Administration’s policies that increases the downside risk to economic activity, but also likely will result in a further pickup in inflation momentum. Based on today’s March job report, the Fed will remain on hold for quite a while.
March Jobs Growth: Stepping Up the Pace
The March jobs report released today indicated that payrolls in the establishment survey grew more than the consensus expectation as they were up by 228,000 persons in March, compared to a 117,000 increase in the preceding month (which was revised down from 151,000 initially). Payrolls growth for January and February combined were revised down by 48,000 persons. Some of the acceleration over the month was due to a return to work by strikers in the retail trade sector compared to February. Federal employment contracted but at a slower pace than previously.
The unemployment rate ticked up 10bps for the second consecutive month to 4.2% in March. In three-digit terms the unemployment rate increase over the month was a lot shallower: from 4.139% in February to 4.152%. Household employment grew in March by 201,000 after -588,000 persons in February (chart above). Given the historical patterns in the chart above, this reversion in household employment growth back in line with the establishment survey was to be expected. Finally, the labor force participation rate ticked up by 10bps to 62.5% after two months of declines.
Underlying Labor Market Trends
The chart above shows both the monthly and three-month moving averages of payrolls changes from the establishment survey since February 2022. The smoothed trend in payrolls growth accelerated throughout Q4 but eased since January. Now let’s compare this smoothed trend with the estimate of the breakeven payrolls growth pace that keeps the unemployment rate constant in a given month conditional on the BLS’ population growth estimates as well as the labor force participation rate in that month. This month this breakeven pace hit 110,000 persons, close to where it had been throughout 2024 (purple line in the above chart). Compared to the three-month average payrolls growth rate this would suggest that the labor market is still creating jobs at a healthy pace.
However, while in January the BLS adjusted its population level for upgraded net immigration projections, the pre-2025 population remained uncorrected and remain well behind pre-2025 population from other institutions like the CBO. The CBO estimates that the working population grew 1.4% in both 2023 and 2024, with the pace to slowdown in 2025 to 0.9%. The chart above therefore also includes an adjusted breakeven payrolls growth pace for a constant unemployment rate, which adjusts the BLS’ population projections for 2020-2025 to bring them line with the CBO’s 2020-2025 noninstitutionalized population estimates (gray line in the chart above).
The CBO-implied breakeven pace needed to keep the unemployment rate at 4.2% is around 208,000 persons in March, down from 215,000 in February as well as its 224,000 persons peak in December. Comparing this to the three-month average payrolls growth rate (orange vs. gray lines in the above chart) suggests that current job growth trends cannot keep up with this more realistic breakeven pace, although the monthly increase (228,000) was above it. So, no imminent improvement is forthcoming in the unemployment rate over the near-term.
Additional details about the underlying strength of the labor market can be inferred from the household employment survey. Following Shimer (AER, 2005) and Shimer (RED, 2012), we can use data on total unemployed and employed persons as well as the number of people that are unemployed for less than 5 weeks to estimate:
Job-finding rate: the probability an unemployed person in month t will find a job or leaves the labor force. This is calculated assuming that total unemployment in month t+1 equals month t unemployment plus the number of people unemployed for less than 5 weeks in month t+1.1
Job-exit rate: the likelihood an employed person in month t will exit its job either due to layoffs, quits or retirement, which depends on data on the job-finding rate, unemployment and labor force.2
The chart above shows a plot for the estimated job-exit rate. This job-exit rate has been relatively stable over the past two years, with a moderate downward shift in the first half of 2023 that stabilized between June and October but then rose again until this summer. Note, however, that the y-axis in the chart above also makes clear that the variability in the separation rate has been really modest.
The job-exit rate eased between January and February but then increased again between February and March (chart above). On a three-month average-basis (orange line in the above chart) job-exits have moved somewhat higher since October, which is somewhat in contrast to the historically low and stable layoff and quits rates as reported in the JOLTS report.
In 2023 the job-finding rate declined a lot after Q1 2023 (chart above) and this decline generally continued in 2024 to about 42% for October going into November. In 2025, the job-findings rate initially deteriorated. In March the overall number of unemployed persons grew at more or less the same pace as the number of newly unemployed persons (less than 5 weeks in duration): +31,000 vs. +25,000. Given that increases in overall unemployment and newly unemployment offset each other, the likelihood to exit unemployment between February and March recovered, with a job-finding rate equal to 48% for February going into March (chart above). Three- and six-month averaged job-finding rates for February into March settled at similar levels.
As in Shimer (AER, 2005) we can combine the above discussed job-exit and job-finding rates to calculate a flow-consistent unemployment rate and the chart above plots both the corresponding monthly rate and the three-month average of this rate. The (three-month average) flow-consistent unemployment rate is the unemployment rate that prevails when the job-exit and job-finding rates remain constant at their current (three-month average) levels. Deviations compared to the official unemployment rate should dissipate over time and frequently leads changes in the official rate.
The chart above shows that the increase in the job-finding rate led to a decline in the monthly flow-consistent unemployment rate for February into March. Given the choppiness in this measure, it’s probably more useful to look at three-month averages. Throughout most of 2024 the flow-consistent unemployment rate on a three-month average basis had been outpacing the official unemployment rate and leading the rise in the latter (solid blue and orange lines in the chart above). This was largely driven by a deterioration in the job finding rate over that period, which reflected labor demand weakening. More recently, three-month averages of headline and flow-consistent unemployment rates suggest that over the near term the unemployment rate will likely remain relatively stable around 4.2%.
Both smoothed payrolls growth trends and the job lows data continue to show signs that the labor market remained stable and close to its underlying equilibrium.
Wage Growth Pace Remains Elevated
Average hourly earnings of all private sector employees grew 0.3% month/month in March, up from 0.2% in February (downwardly revised from 0.3%), but eased in year/year terms from (an unrevised) 4.7% in February to 4.5%. For production and non-supervisory workers, hourly earnings also decelerated, to 0.2% month/month in March from (an upwardly revised) 0.4% in the preceding month, and on a year/year basis growth slowed to 4.4% from (an upwardly revised) 4.7% in February.
The wage data from the jobs report are notoriously noisy, given that they are revised often and do not correct for the sectoral and skills composition of jobs growth over the month. There are better quality wage data available, such as the Atlanta Fed Wage Growth Tracker and the Employment Cost Index, but the Atlanta Fed does construct a rudimentary composition correction for average hourly earnings from the jobs report, which can be found here.
This month in particular compositional effects might have distorted the hourly wage data more than usual, as retail trade employees (which tend have lower hourly wage rates) were in strike in February and came back to work in March. When applying the Atlanta Fed composition correction on the monthly average hourly earnings for February, the correction kept the rate at the official growth rates in February for both all and production & non-supervisory workers. For March applying the correction gives an hourly wage growth rate of 0.4% month/month for all private workers and 0.3% for production and non-supervisory workers, in both cases 10bps higher than the official data.
From the chart above one can observe that the three- and six-month wage growth rates have been relatively stable since the end-2024. On a three-, six- and twelve-month basis composition-adjusted wage growth have running at or above 4% for most of 2024 and going into 2025.
I can combine labor productivity and labor share trend estimates with the 2% inflation target, along the lines I have done in my “Wages and Inflation Expectations” notes and incorporating the 2024 Q4 update of productivity data to get a medium-run annual wage growth rate consistent with 2% inflation.
Additionally, instead of the 2% target one can use my “Main Street” year-ahead inflation expectations proxy, i.e., the common trend across survey-based near-term inflation expectations from firm and consumer surveys. After incorporating March data for the Conference Board, University of Michigan and Atlanta Fed surveys this estimate suggests "Main Street" inflation expectations in the chart above rose notably throughout Q1, from 2.4% y/y PCE inflation in Q4 to 3.4% in March. Inflation expectations among firms and households point to heightened near-term concerns amid policy uncertainty.
Compared to both the composition-adjusted AHE data for production and non-supervisory workers for February and the unsmoothed Atlanta Fed wage tracker into January, annual wage growth rates still outpace the 2.75% pace consistent with 2% PCE inflation in the medium term (green line in the above chart). Current wage growth runs more closer in line with the wage growth pace consistent with 3.4% PCE inflation implied by “Main Street” near-term inflation expectations for March (blue line in the chart above).
After the conclusion of the March FOMC meeting the Fed clearly signaled that there should not be a lot of policy easing in the pipeline given stalling progress on inflation. The tariff announcements earlier this week have upped the inflation risks even more relative the March SEP inflation projections although the downside risk to the labor market likely also have gone up. Today’s March jobs report showed a relatively stable labor market where the unemployment rate essentially at its steady state level. Furthermore, wage growth still has a solid momentum, especially corrected for composition effects. So, given ongoing uncertainty regarding the execution of tariff hikes the Fed is likely to stay on hold for, at least, the first half of the year.
Given this calculation, the job-finding rate will run up to February utilizing data on (short-term) unemployment for March.
As the calculation of the job-separation rate depends also on (short-term) unemployment for March, we cannot go beyond February.