US labor market remains in good shape

February 28, 2020 16:19
The impact from the manufacturing recession on the labor market in the US has so far remained largely localized to states that are more industrialized, the author notes. Photo: Reuters

US job openings dropped to a two-year low in December, with most sectors and regions pointing in the same direction. Retail and transportation were particularly affected, accounting for 40 percent of the decline in vacancies at the end of last year. This has raised some concerns that the weakness in the manufacturing sector may be spilling over to the rest of the economy, and will eventually drive the unemployment rate higher.

An alternative view, one that we share, is that the drop in job openings reflects in part better job matching and a greater willingness of employers to hire and train workers rather than flashing a red signal for the labor market outlook. On way to illustrate this point is through the Beveridge curve, which links job openings and the unemployment rate. It slopes downward, as a higher rate of unemployment normally occurs with a lower rate of openings. If it moves towards the right, a given level of vacancies is associated with a higher level of unemployment, implying a fall in labor market efficiency. This could reflect skill mismatches between available jobs and the pool of unemployed workers.

To some extent, the curve appeared to have moved outwards for most of the time between 2018 and 2019, with the rise in job openings associated with a smaller decline in the unemployment rate than expected. But the latest drop in vacancies has been associated with a stable unemployment rate, a pickup in job growth (a net majority of industries reported an acceleration in employment over the past three months), a higher job finding rate and a higher participation rate, particularly among prime-age workers. All of this points to greater labour market efficiency.

This was recently echoed by San Francisco Fed President Mary Daly who argued that the sustainable unemployment rate could be as low as 3.5 percent, well below FOMC members’ current estimate of 4.1 percent. Other indicators of labor demand are also encouraging. The NFIB small business survey suggests that job openings picked up again in January. The net percentage of workers reporting that jobs are plentiful also rose at the start of the year and is close to its cyclical high, while the share of involuntary part -time workers fell.

Finally, it seems that the impact from the manufacturing recession on the labor market has so far remained largely localized to states that are more industrialized, with little spillovers to the rest of the economy. Indeed, over the past year, the unemployment rate has fallen in thirty eight states. In the other thirteen, ten have a higher share of employment in the manufacturing sector than the national average. Only Delaware, Oklahoma and New York saw a pick-up in the jobless rate, despite a relatively low share of manufacturing employment.

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International Economist, Bank J Safra Sarasin