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05 10 2016 | by Victor Xing | Economics

Job polarization through the lens of March JOLTS

Summary of March JOLTS

March JOLTS (Job Openings and Labor Turnover Survey) from the Bureau of Labor Statistics (BLS) indicated persisting job polarization in the U.S. labor market.  Aggregate readings may suggest a case of labor skill mismatch: job vacancy rate rose to 3.9%, a level last seen in July 2015 and January 2001, while hire rate declined to 3.7% from 3.8%.  Quit rate remained unchanged at 2.1%.

March JOLTS
Vacancy rate again reached a historic 3.9% while hire rate declined to 3.7%. Quit rate unchanged at 2.1%

Nevertheless, other structural trends appear to be more durable than that of skill mismatch.  Details of the report indicated persisting job polarization with soft vacancy and hiring data in middle-skilled positions: labor turn-over in cognitive non-routine (professional and business services) and manual non-routine (leisure and hospitality) professions consistently outpaced cognitive routine (government and education) and manual routine (durable goods manufacturing) positions.

Job polarization and “hollowing out” of the middle skill jobs

Relative to the aggregate measure of 3.9%, vacancy rate in the higher-wage professional and business services sector achieved an impressive 5.8%.  Low-wage service sector job vacancies (accommodation and food services plus leisure and hospitality sectors) are also plentiful, while soft readings in manufacturing, construction, and government jobs support the thesis of “hollowing out” of middle skill jobs.

Job polarization
Professional and business services led the increase in vacancy rate (aggregate: 3.9%)

The skill mismatch thesis is more evident in the health care and social assistance sector (vacancy rate at 4.8% vs. hire rate of 2.8% and quit rate at 1.8%), while vacancy and hire rates in the professional and business services sector are closer to parity at 5.8% and 5.3%, respectively.  In comparison, the rate of hiring in manual non-routine professions have outpaced job postings.  The apparent abundance of low-paying (and non-automated) service sector jobs also boosted the sector’s quit rate.

Job polarization
Manual non-routine jobs led the rise in hire rate, followed by cognitive non-routine jobs
Job polarization
Manual non-routine jobs led the increase in quit rate, followed by cognitive non-routine jobs

Monetary policy implications

Job polarization is an on-going source of structural unemployment and underemployment.  By nature, accommodative monetary policies have limited efficacy on structural labor market weakness (such as job automation and demographic shifts).  However, “post-liftoff” policy communications by Chair Yellen have rarely mentioned structural factors affecting the labor market.  The most recent of speech that briefly covered this topic was in July 2015 – and subsequent comments by the Fed Chair had largely highlighted the cyclical nature of labor market slack.

Another factor we consider when assessing labor market slack is the elevated number of workers who are employed in part-time jobs but would prefer to have full-time work–in other words, those classified as “part time for economic reasons.” At around 4-1/2 percent of employment, the share of such workers is notably larger than has been historically typical in a growing economy. Some portion of the greater share of workers who are part time for economic reasons may reflect structural rather than cyclical factors. For example, the ongoing shift in employment away from manufacturing and toward services, a sector which historically relied more heavily on part-time workers, may be boosting the share of part-time jobs. Despite these structural trends, which make it difficult to know where the share of those employed part time for economic reasons may settle in the longer run, I continue to think that it probably remains higher than it would be in a full-employment economy.

New York Fed President Dudley was largely optimistic on U.S. labor market conditions in a recent NYT interview, and he saw benefits to “let the economy run a little bit hot” to further tighten labor market slack and push up inflation:

One reason you’d want to let the economy run a little bit hot in terms of putting a little bit of pressure on the labor market is not just because that’s what you need to do to push inflation back to 2 percent but also because it will help to bring the long-term unemployed back into the labor force and give them opportunities.

Uneven labor market growth is a drag on real wage growth.  Since monetary policy tools resemble blunt instruments rather than a scalpel, policymakers’ desire to foster higher inflation via stronger labor market will result in further services inflation (rent, medical services, etc) and even more impressive readings in cognitive non-routine professions (sectors with high turn-overs continue to lead in payroll gains).

Job polarization
Services inflation – higher services cost (wage growth) passed down to consumers

Under this framework, there are several policy paths under the base-case scenario of uneven job growth and below-target headline inflation (amid on-target services inflation and several job sectors “running hot”):

  • [Current Fed policy over the near term] Highlight aggregate progress toward the maximum employment mandate and its likely boost to wage growth and headline PCE (faith on the Phillips curve – hammer the nail of low aggregate inflation with accomodative monetary policy while maintaining a gradual rate path)
  • [75% likelihood over the medium term, with probability decreasing overtime] Maintain a shallow policy path (mark-to-market given markets’ “pessimistic pricing“) as aggregate wage growth and inflation remain constrained by job polarization and structural factors within the labor market (please also refer to our analysis on accommodative policy’s disinflationary effects on consumer spending)
  • [20% likelihood over the medium term, with probability increasing overtime] Fed policymakers acknowledge limits of monetary policy to counter non-cyclical economic conditions and proceed with steady policy normalization.  This has the potential to trigger a funding crisis (or induce FCI tightening seen in “taper tantrum”) if markets are caught by surprise
  • [5% likelihood over the medium term] Doubledown on policy accommodation – use forward guidance to signal reinvestment program to continue until further notice (remove the “until normalization of the level of the federal funds rate is well under way” language from the FOMC statement), back to zero lower bound, and re-initiate QE

Next article05 06 2016 | by Victor Xing | Capital Markets

April Payrolls and the “Dudley surprise”