The headlines for the August job numbers released this morning are nothing but good. Employers added a robust 201,000 jobs, the unemployment rate remained at the rock-bottom level of 3.9 percent, and wages grew the fastest they have in nine years.
There’s no doubt that this is the best economy in quite a long time for American workers, who by a wide range of measures can find a job more easily than they have in a decade.
But when you pull apart the details, you also find hints that this is an economy running awfully close to its capacity. If that’s the case — and one month’s worth of numbers isn’t enough to make the case definitively — it implies we should expect both slower growth and steeper Federal Reserve interest rate increases in the next couple of years.
The economic output of the United States is ultimately limited by the number of people who want to work, the capabilities of the machines and other types of capital they can work with, and the skill of managers at putting those workers and machines to the best possible use.
The new employment numbers don’t tell us anything about the second two dimensions of economic potential, but give us some new information about the first, and it isn’t good.
The labor force participation rate — the share of the adult population either working or looking for a job — fell by 0.2 percentage points to 62.7 percent. The share of the population working also fell by 0.2 percentage points.
It’s hard to discern any positive long-term trend in the share of the adult population that is looking to be part of the work force. In mid-2008, more than 66 percent of adults were in the labor force, which fell to 62.7 percent in early 2015.
It has bounced around in the three and a half years since, but ended up at the exact same level. There is no obvious positive trend.
A big part of that is demographic change, as the baby boom generation hits retirement age. The numbers are better if you narrow your focus to people in their prime working years, between ages 25 and 54. But there, too, there is reason to think that progress in putting more people to work has been nonexistent this year.
The share of those 25 to 54 working, 79.3 percent in August, is the same as it was in February. A spike in that level in July wasn’t sustained last month.
Ultimately, if the economy is going to keep adding 200,000 jobs a month and grow at the kind of boom-time pace that was evident this past spring, it will need a growing work force to fill those jobs and make those goods and services. There’s not too much evidence that there are in fact hordes of younger people currently on the sidelines of the labor market who might soon be coaxed back in.
Which brings us to the wage numbers. It’s good news that average hourly earnings are up 2.9 percent over the last year, a sign that employers are having to boost pay to keep good employees (or pay more to poach them from competitors).
Wage gains would still need to accelerate further to get to the kinds of levels that are historically normal; in 2008, for example, the year the recession began, average hourly earnings rose 3.6 percent.
But the fact that higher pay raises are finally showing up in the data is another piece of evidence that employers are coming up against the limits of the labor force. Just maybe, after years of trying every recruitment technique other than raising hourly pay, employers are starting to turn more to that option.
In other words, the labor market could finally be so tight that employers just don’t have a choice if they want to attract and retain workers.
As always, it would be a mistake to read too much into a single month’s report, and both the good and bad news in the August numbers could vanish as soon as the September data is on the books.
But as the Federal Reserve tries to decide how much to raise interest rates this year and next, and as forecasters examine how much room to run this expansion has, it’s worth taking the August numbers as a sign for the economy as a whole: Help Wanted.
