Nov. Payrolls: Bouncing Back ... Sort Of
November payrolls growth predictably bounced back, but the unemployment rate picked up again with a low job-finding rate. Wage growth remains elevated.
Today’s release of the November Employment Situation report was very much affected by an unwind of several special factors that impacted the labor market in October. Payrolls growth accelerated sharply, but the unemployment rate moved up owing to a low job-finding probability for an unemployed person. Wage growth remained elevated compared to trends. This report in of itself will not deter the Fed from cutting its policy rate at the upcoming December FOMC meeting.
Key takeaways:
Payrolls growth picked up the pace in November, but near-term trends still run below the breakeven pace needed to keep the unemployment rate constant at current levels given higher-than-expected population growth.
The unemployment rate increased to 4.2% as the labor force participation rate decreased again from 62.6% to 62.5%.
The job-finding rate improved ever so slightly over the month to 42% with smoothed trends at around 45%. The unemployment rate consistent with recent job-separation and job-finding rates increased; smoothed trends suggest that in the near term the unemployment rate will likely stabilize around 4.2%.
Wage growth in composition-adjusted average hourly earnings remains elevated at paces inconsistent with both the 2% inflation target and near-term inflation expectations.
Today’s data will not deter the Fed from cutting its policy rate again at the upcoming December FOMC meeting, but consumption, inflation and wage data suggests at best a very gradual easing of the future policy rate path.
November Jobs Growth: Bouncing Back
The November jobs report released today indicated that payrolls in the establishment survey grew more or less in line with consensus as they were up by 227,000 persons in November, compared to a muted 34,000 increase in the preceding month (which was revised up from 12,000 initially). Payrolls growth for September and October combined were revised up by 56,000 persons.
The unemployment rate ticked up 10bps to 4.2% in November. In three-digit terms the unemployment rate went up from 4.145% in October to 4.246%. Household employment contracted again in November: from -368,000 persons in October to -355,000 (chart above). As shown in the chart above, household survey-based employment growth is a lot more volatile than payrolls growth, so expect some upside risk to the household employment numbers in the next jobs report. The labor force declined for the second consecutive month by 193,000 persons, after decreasing 220,000 in the previous month. The population grew of 174,000 persons in November with the labor force participation rate decreasing from 62.6% in October to 62.5%.
Underlying Labor Market Trends
Moving beyond the month-to-month movements, the chart above shows three- and six-month moving averages of payrolls changes from the establishment survey since February 2022. With upward revisions to the September and October data smoothed trends in payrolls growth appear to have bounced back somewhat recently and are above the breakeven pace needed to keep the unemployment rate constant in a given month based on Census-based BLS population numbers (purple line in the above chart). This does not change after naively incorporating the results of the Preliminary Benchmark revision published in August, as I did at the time (blue and orange dashed lines in the chart above).
Note that the estimate of the breakeven pace that keeps the unemployment rate constant in a given month is conditional on the BLS’ population growth estimates as well as the labor force participation rate in that month. There’s been a lot of public discourse on the validity of the population growth projections from the U.S. Census that are used by the BLS. In particular when it comes to net immigration projections the Census has been criticized a lot. For example, the CBO’s population projections assume more aggressive net immigration numbers for 2023 and 2024, resulting in noninstitutionalized population estimates of about 268 million in 2023 (vs about 266 million from Census) and about 271 million in 2024.
The chart above also includes an adjusted breakeven payrolls growth pace for a constant unemployment rate, which adjusts the BLS’ population projections for 2023 and 2024 such that they are line with the CBO’s 2023 and 2024 noninstitutionalized population estimates (gray line in the chart above). By comparing the trends in (revised) payrolls to this adjusted breakeven pace it seems the even in November near-term trends payrolls growth falls short of keeping up with the higher CBO population growth projections. The CBO-implied breakeven pace is around 194,000 persons in November vs. about 113,000 using the BLS population estimates. As such this is in line with the pickup in the unemployment rate in November, and the chart above suggests there remains some upside risk to the unemployment rate in the next jobs report.
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 jumped up between June and August and but has been decreasing notably between August and October (chart above). The odds of a job exit, however, picked up again from October going into November, likely owing to the decline in the labor force in October-November as well as a pickup in the quits rate for October.
In 2023 the job-finding rate declined a lot after Q1 2023 (chart above) but recovered to about 54% on the month and 52% on a three-month average basis in December of that year. However, in 2024 the job-finding rate declined again and continued to do so until June going into July when it stabilized around a low 43%, followed by an increase to about 52% between July and August. The odds of finding exiting unemployment decreased again after August, initially to about 49% and then further to about 41% in for September going into October.
In November the total number of unemployed persons increased over the month, but the number of newly unemployed persons (less than 5 weeks in duration) increased at a shallower pace: +161,000 vs. +97,000. This suggests that the likelihood to exit unemployment between October and November only improved marginally, with the job-finding rate going up from about 41% to about 42% for October going into November (chart above). Three- and six-month averaged job-finding rates for September into October settled at around 45%.
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 often leads changes in the official rate.
The chart above shows clearly that the improvements in the job-exit and job-finding rates between July and September led to a drop in the monthly flow-consistent unemployment rate to levels not seen since the start of the year. However, the drop the job-finding rate since September led to the flow-consistent unemployment rate rising to 4.4% for the most recent month.
Given the choppiness in this measure, it’s probably more useful to look at three-month averages. Since January the flow-consistent unemployment rate on a three-month average basis has 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 reflects labor demand weakening. More recently, and despite this month’s jump in the flow-consistent measure, three-month averages of headline and flow-consistent unemployment rates suggest that over the near term the unemployment rate will likely stabilize around 4.2%.
Despite the bounce back in payrolls in November, when taking into account higher-than-expected population growth smoothed payrolls growth trends need to continue their pickup in pace to avoid a faster rise in the unemployment rate. The household survey continues to point to very low job-finding and without a substantial recovery in these metrics in upcoming jobs report it’s, for now, hard to see the unemployment rate dropping meaningfully below 4.2%.
Wage Growth Remains Elevated
Average hourly earnings of all private sector employees grew at a firm 0.4% month/month in November, like October, and accelerated in year/year terms from (an unrevised) 3.3% in October to 4.1%. For production and non-supervisory workers, hourly earnings went up at 0.3% month/month in October, down from (an upwardly revised) 0.4% in the preceding month, and on a year/year basis growth accelerated from (an upwardly revised) 3.7% to 4% in November.
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.
We can observe from the chart above is that the year/year wage growth rate indeed picked up, despite the composition correction, and on a three- and six-month basis composition-adjusted wage growth have running above 4% since September.
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 Q3 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 November survey data this trend in near-term inflation expectations eased since Q2 to around 2.4% in year/year PCE inflation terms in November (chart above).
Compared to both the composition-adjusted AHE data for production and non-supervisory workers for November and the unsmoothed Atlanta Fed wage tracker into October, annual wage growth rates still outpace the 2.8% pace consistent with 2% PCE inflation in the medium term (green line in the above chart). In fact, wage growth also runs above the wage growth pace consistent with “Main Street” near-term inflation expectations (blue line in the chart above).
November Rate Cut
After the conclusion of the September FOMC meeting the Fed clearly signaled that the 50bps rate cut following that meeting was nothing more than a recalibration move, and that it would ease policy rates at more moderate pace beyond that meeting. This was based on the notion that the U.S. economy was on a moderate growth path with a labor market cooling towards a steady state with unemployment rates in the low 4% range and inflation that continues to ease back towards 2% over time. Today’s data suggest that indeed the unemployment rate continues to evolve along those lines. However, wage growth remains sticky and could become a concern for the Fed in the near term, especially since the disinflation trend lost momentum.
I expect another 25bps rate cut at the December FOMC meeting. However, with wage growth momentum remaining stubbornly elevated as well as a pick-up in underlying inflation momentum and household spending growth the Fed’s appetite for rate cuts in 2025 is diminishing and likely will give way to a prolonged pause in the easing cycle.
Given this calculation, the job-finding rate will run up to October utilizing data on (short-term) unemployment for November.
As the calculation of the job-separation rate depends also on (short-term) unemployment for November, we cannot go beyond October.