Looking Beyond the Latest U.S. Jobs Data
Every month the top-line data about the growth of jobs and wages in the U.S. economy are swiftly dissected by the financial markets for indications about the strength and direction of the economy. Yet the importance of these monthly statistics as they relate to U.S. income inequality and more long-term economic growth is often ignored.
Take the increase in hourly wages in June as well as the number of new jobs added in the U.S economy as reported today by the U.S. Bureau of Labor Statistics. Over the past year, hourly wages in the private sector grew by 2.0 percent, and over the past three months they grew at an annual rate of about 2.2 percent. With nominal wages rising at those rates and annual inflation close to zero, current hourly pay increases are amounting to significant real wage gains (adjusting for inflation).
Yet at the same time, nominal wage growth of less than 3.5 to 4.0 percent is not an encouraging phenomenon over the long term as it implies increasing inequality between those who rely on earned income and owners of capital. Over a longer period, with the current rate of wage gains workers will be taking home a smaller share of national income, assuming the Federal Reserve inflation target of 2.0 percent and productivity growth of about 1.5 percent.
Similarly, the 223,000 new jobs added in June along with revisions to prior months means that over the past three months the U.S. economy added about 221,000 jobs on average. These gains are a welcome development, but they represent less than 0.2 percent of the average monthly employment level about 142 million. These net changes in employment also obscure the large flows in and out of employment, as workers are hired and as employees separate from their workplaces to take other jobs or slip into the ranks of the unemployed.
Employers hired more than 5 million workers in April, the most recent data available from the Job Openings and Labor Turnover Survey, and nearly 4.9 million left their jobs. The monthly turnover rate—total hires into employment and total separations from employment—was close to 3.5 percent, more than 20 times the size of the net employment change reported in that month.
In addition, these aggregate employment flows mask large differences in turnover rates across industries, with lower-paying industries in particular experiencing higher turnover. (See Figure 1.)
By turning to another data source on employment flows, the Quarterly Workforce Indicators, we can compare how industry-specific turnover rates relate to average pay. The quarterly turnover rate for the overall private sector is typically about 19.6 percent, when measured over the past decade. In the manufacturing sector, where workers are paid about 23.2 percent more than the average worker, turnover rates are much lower, at 9.7 percent. In the accommodation and food services industry, where the average employee earns substantially less, turnover rates are higher than average, at 30.9 percent.
There are several reasons why lower paying industries have higher turnover, such as having workers that are younger, with lower levels of education, or with less training. But research on the minimum wage shows that when specific industries, such as restaurants, are compelled to pay a higher wage, worker turnover falls sharply. After a minimum wage increase, restaurants tend to hire fewer workers, but fewer workers leave these jobs as well. Total restaurant employment levels do not change much in response to higher minimum wages, but restaurant workers now stay at their job longer, gaining more experience.
In the case of a minimum wage increase, pay increases reduce flows in and out of employment for industries and demographic groups that are most affected by minimum wages, among them restaurants and younger workers. In contrast, when the overall labor market improves, we should expect higher turnover along with higher wages. As overall demand grows, hiring rates will rise as employers hire more workers, but so will separations: it is easier for employers to recruit workers from one job to another by offering higher wages.
Although minimum wage policies seem to affect employment flows without changing employment levels, other policies, such as the recently proposed changes to the federal overtime rule, may affect both. Employers may respond to this measure by reducing hours, but they will correspondingly hire more workers to satisfy demand. In this way, the overtime measure will increase the number of jobs through the hiring rate.
Both gross flows and net changes are key markers for economists and policymakers alike to explore whenever new employment and wage growth data are released. They enable a broader understanding of the overall direction of the U.S. economy as it relates to inequality and growth.