Ordinarily, on the first Friday of a month the Bureau of Labor Statistics (BLS) releases its “Employment Situation” report (often called the “jobs report”) containing data on the labor market for the previous month. There was no jobs report today (October 3) because of the federal government shutdown. (We discuss the shutdown in this blog post.)
The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and Federal Reserve policymakers believe that employment data from the establishment survey provide a more accurate indicator of the state of the labor market than do the household survey’s employment and unemployment data.
Economists surveyed had forecast that today’s payroll survey would have shown a net increase of 51,000 jobs in September. When the shutdown ends, the BLS will publish its jobs report for September. Until that happens, employment data collected by the private payroll processing firm Automatic Data Processing (ADP) provides an alternative measure of the state of the labor market. ADP data covers only about 20 percent of total private nonfarm employment, but ADP attempts to make its data more consistent with BLS data by weighting its data to reflect the industry weights used in the BLS data.
How closely does ADP employment data track BLS payroll data? The following figure shows the ADP employment series (blue line) and the BLS payroll employment data (red line) with the values for both series set equal to 100 in January 2010. The two series track well with the exception of April and May 2020 during the worst of the pandemic. The BLS series shows a much larger decline in employment during those months than does the ADP series.
The next figure shows the 12-month percentage changes in the two series. Again, the series track fairly well except for the worst months of the pandemic and—strikingly—the month of April 2021 during the economic recovery. In that month, the ADP series increases by only 0.6 percent, while the BLS series soars by 13.1 percent.
Finally, economists, policymakers, and investors usually focus on the change in payroll employment from the previous month—that is, the net change in jobs—shown in the BLS jobs report. The following figure shows the net change in jobs in the two series, starting in January 2021 to avoid some of the largest fluctuations during the pandemic.
Again, the two series track fairly well, although the BLS data is more volatile. The ADP data show a net decline of 32,000 jobs in September. As noted earlier, economists surveyed were expecting a net increase of 51,000 jobs. During the months from May through August, BLS data show an average monthly net increase in jobs of only 39,250. So, whether the BLS number will turn out to be closer to the ADP number or to the number economists had forecast, the message would be the same: Since May, employment has grown only slowly. And, of course, as we’ve seen this year, whatever the BLS’s initial employment estimate for September turns out to be, it’s likely to be subject to significant revision in coming months. (We discuss why BLS revisions to its initial employment estimates can be substantial in this post.)
As we noted in yesterday’s blog post, the latest “Employment Situation” report from the Bureau of Labor Statistics (BLS) included very substantial downward revisions of the preliminary estimates of net employment increases for May and June. The previous estimates of net employment increases in these months were reduced by a combined 258,000 jobs. As a result, the BLS now estimates that employment increases for May and June totaled only 33,000, rather than the initially reported 291,000. According to Ernie Tedeschi, director of economics at the Budget Lab at Yale University, apart from April 2020, these were the largest downward revisions since at least 1979.
The size of the revisions combined with the estimate of an unexpectedly low net increase of only 73,000 jobs in June prompted President Donald Trump to take the unprecedented step of firing BLS Commissioner Erika McEntarfer. It’s worth noting that the BLS employment estimates are prepared by professional statisticians and economists and are presented to the commissioner only after they have been finalized. There is no evidence that political bias affects the employment estimates or other economic data prepared by federal statistical agencies.
Why were the revisions to the intial May and June estimates so large? The BLS states in each jobs report that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.” An article in the Wall Street Journal notes that: “Much of the revision to May and June payroll numbers was due to public schools, which employed 109,100 fewer people in June than BLS believed at the time.” The article also quotes Claire Mersol, an economist at the BLS as stating that: “Typically, the monthly revisions have offsetting movements within industries—one goes up, one goes down. In June, most revisions were negative.” In other words, the size of the revisions may have been due to chance.
Is it possible, though, that there was a more systematic error? As a number of people have commented, the initial response rate to the Current Employment Statistics (CES) survey has been declining over time. Can the declining response rate be the cause of larger errors in the preliminary job estimates?
In an article published earlier this year, economists Sylvain Leduc, Luiz Oliveira, and Caroline Paulson of the Federal Reserve Bank of San Francisco assessed this possibility. Figure 1 from their article illustrates the declining response rate by firms to the CES monthly survey. The figure shows that the response rate, which had been about 64 percent during 2013–2015, fell significantly during Covid, and has yet to return to its earlier levels. In March 2025, the response rate was only 42.6 percent.
The authors find, however, that at least through the end of 2024, the falling response rate doesn’t seem to have resulted in larger than normal revisions of the preliminary employment estimates. The following figure shows their calculation of the average monthly revision for each year beginning with 1990. (It’s important to note that they are showing the absolute values of the changes; that is, negative change are shown as positive changes.) Depite lower response rates, the revisions for the years 2022, 2023, and 2024 were close to the average for the earlier period from 1990 to 2019 when response rates to the CES were higher.
The weak employment numbers correspond to the period after the Trump administration announced large tariff increases on April 2. Larger firms tend to respond to the CES in a timely manner, while responses from smaller firms lag. We might expect that smaller firms would have been more likely to hesitate to expand employment following the tariff announcement. In that sense, it may be unsurprising that we have seen downward revisions of the prelimanary employment estimates for May and June as the BLS received more survey responses. In addition, as noted earlier, an overestimate of employment in local public schools alone accounts for about 40 percent of the downward revisions for those months. Finally, to consider another possibility, downward revisions of employment estimates are more likely when the economy is heading into, or has already entered, a recession. The following figure shows the very large revisisons to the establishment survey employment estimates during the 2007–2010 period.
At this point, we don’t fully know the reasons for the downward employment revisions announced yesterday, although it’s fair to say that they may have been politically the most consequential revisions in the history of the establishment survey.
This morning (June 6), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for May. The data in the report show that the labor market continues to be strong. There have been many stories in the media about businesspeople becoming pessimistic as a result of the large tariff increases the Trump Administration announced on April 2—some of which have since been reduced—but we don’t see the effects in the employment data. Some firms may be maintaining employment until they receive greater clarity about where tariff rates will end up. Similarly, although there are some indications that consumer spending may be slowing, to this point, the effects are not evident in the labor market.
The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and Federal Reserve policymakers believe that employment data from the establishment survey provide a more accurate indicator of the state of the labor market than do the household survey’s employment data and unemployment data. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)
According to the establishment survey, there was a net increase of 139,000 nonfarm jobs during May. This increase was above the increase of 125,000 that economists surveyed had forecast. Somewhat offsetting this increase, the BLS revised downward its previous estimates of employment in March and April by a combined 95,000 jobs. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”) The following figure from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years.
The unemployment rate was unchanged to 4.2 percent in May. As the following figure shows, the unemployment rate has been remarkably stable over the past year, staying between 4.0 percent and 4.2 percent in each month since May 2024. In March, the members of the Federal Open Market Committee (FOMC) forecast that the unemployment rate for 2025 would average 4.4 percent.
As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. As measured by the household survey, there was a net decrease of 696,000 jobs in May, following an increase of 461,000 jobs in April. As an indication of the volatility in the employment changes in the household survey note the very large swings in net new jobs in January and February. In any particular month, the story told by the two surveys can be inconsistent with employment increasing in one survey while falling in the other. This month, the discrepancy between the two surveys in their estimates of the change in net jobs was particularly large. (In this blog post, we discuss the differences between the employment estimates in the two surveys.)
The household survey has another important labor market indicator. The employment-population ratio for prime age workers—those aged 25 to 54—declined from 80.7 percent in April to 80.5 percent in May. The prime-age employment-population ratio is somewhat below the high of 80.9 percent in mid-2024, but is above what the ratio was in any month during the period from January 2008 to December 2019.
It remains unclear how many federal workers have been laid off since the Trump Administration took office. The establishment survey shows a decline in total federal government employment of 22,000 in May and a total decline of 59,000 beginning in February. However, the BLS notes that: “Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.” It’s possible that as more federal employees end their period of receiving severance pay, future jobs reports may report a larger decline in federal employment. To this point, the decline in federal employment has been too small to have a significant effect on the overall labor market.
The establishment survey also includes data on average hourly earnings (AHE). As we noted in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage of being available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. The AHE increased 3.9 percent in May. Movements in AHE have been remarkably stable, showing increases of 3.9 percent each month since January.
The following figure shows wage inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month wage inflation, whereas this figure shows 1-month wage inflation.) One-month wage inflation is much more volatile than 12-month wage inflation—note the very large swings in 1-month wage inflation in April and May 2020 during the business closures caused by the Covid pandemic. In May, the 1-month rate of wage inflation was 5.1 percent, up sharply from 2.4 percent in April. If the 1-month increase in AHE is sustained, it would indicate that the Fed will struggle to achieve its 2 percent target rate of price inflation. But one month’s data from such a volatile series may not accurately reflect longer-run trends in wage inflation.
Today’s jobs report leaves the situation facing the Federal Reserve’s policy-making Federal Open Market Committee (FOMC) largely unchanged. Looming over monetary policy, however, is the expected effect of the Trump Administration’s tariff increases. As we note in this blog post, a large unexpected increase in tariffs results in an aggregate supply shock to the economy. In terms of the basic aggregate demand and aggregate supply model that we discuss in Macroeconomics, Chapter 13 (Economics, Chapter 23), an unexpected increase in tariffs shifts the short-run aggregate supply curve (SRAS) to the left, increasing the price level and reducing the level of real GDP.
One indication of expectations of future changes in the FOMC’s target for the federal funds rate comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) The data from the futures market indicate that, despite the potential effects of the tariff increases, investors don’t expect that the FOMC will cut its target for the federal funds rate at its June 17–18 meeting. As shown in the following figure, investors assign a 99.9 percent probability to the committee keeping its target unchanged at 4.25 percent to 4.50 percent at that meeting.
As the following figure shows, investors don’t expect the FOMC to cut its federal funds rate target until the committee’s September 16-17 meeting. Investors assign a probability of 54.6 percent that at that meeting the committee will cut its target range by 0.25 percentage point (25 basis points) to 4.00 percent to 4.25 percent. And a probability of 9.4 percent that the committee will cut its target rate by 50 baisis points to 3.75 percent to 4.00 percent. At 35.9 percent, investors assign a fairly high probability to the committee keeping its target range constant at that meeting.
As we’ve noted in earlier posts, according to the usually reliable GDPNow forecast from the Federal Reserve Bank of Atlanta, real GDP in the first quarter of 2025 will decline by 2.8 percent. This morning (April 4), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for March. The data in the report show no sign that the U.S. economy is in a recession. We should add two caveats, however: 1. The effects of the unexpectedly large tariff increases announced this week by the Trump Administration are not reflected in the data from this report, and 2. at the beginning of a recession the data in the jobs report can be subject to large revisions.
The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and Federal Reserve policymakers believe that employment data from the establishment survey provide a more accurate indicator of the state of the labor market than do the household survey’s employment data and unemployment data. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)
According to the establishment survey, there was a net increase of 228,000 jobs during March. This increase was well above the increase of 140,000 that economists had forecast. Somewhat offsetting this unexpectedly large increase was the BLS revising downward its previous estimates of employment in January and February by a combined 48,000 jobs. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”) The following figure from the jobs report shows the net change in payroll employment for each month in the last two years.
The unemployment rate rose slightly to 4.2 percent in March from 4.1 percent in February. As the following figure shows, the unemployment rate has been remarkably stable in recent months, staying between 4.0 percent and 4.2 percent in each month since May 2024. In March, the members of the Federal Open Market Committee (FOMC) forecast that the unemployment rate for 2025 would average 4.4 percent.
As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. As measured by the household survey, there was a net increase of 201,000 jobs in March, following a sharp decrease of 588,000 jobs in February. In any particular month, the story told by the two surveys can be inconsistent with employment increasing in one survey while falling in the other. This month, however, both surveys showed roughly the same net job increase. (In this blog post, we discuss the differences between the employment estimates in the two surveys.)
One concerning sign in the household survey is the fall in the employment-population ratio for prime age workers—those aged 25 to 54. The ratio declined from 80.5 percent in February to 80.4 percent in March. Although the prime-age employment-population is still high relative to the average level since 2001, it’s now well below the high of 80.9 percent in mid-2024. Continuing declines in this ratio would indicate a significant softening in the labor market.
It’s unclear how many federal workers have been laid off since the Trump Administration took office. The establishment survey shows a decline in total federal government employment of 4,000 in March. However, the BLS notes that: “Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.” It’s possible that as more federal employees end their period of receiving severance pay, future jobs reports may find a more significant decline in federal employment.
The establishment survey also includes data on average hourly earnings (AHE). As we noted in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage of being available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. The AHE increased 3.8 percent in March, down from 4.0 percent in February.
The following figure shows wage inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month wage inflation, whereas this figure shows 1-month wage inflation.) One-month wage inflation is much more volatile than 12-month wage inflation—note the very large swings in 1-month wage inflation in April and May 2020 during the business closures caused by the Covid pandemic. The March 1-month rate of wage inflation was 3.0 percent, up from 2.7 percent in February. Whether measured as a 12-month increase or as a 1-month increase, AHE is still increasing somewhat more rapidly than is consistent with the Fed achieving its 2 percent target rate of price inflation.
Taken by itself, today’s jobs report leaves the situation facing the Federal Reserve’s policy-making Federal Open Market Committee (FOMC) largely unchanged. There are some indications that the economy may be weakening, as shown by some of the data in the jobs report and by some of the data incorporated by the Atlanta Fed in its pessimistic nowcast of first quarter real GDP. But the Fed hasn’t yet brought inflation down to its 2 percent annual target.
Looming over monetary policy is the fallout from the Trump Administration’s implementation of unexpectedly large tariff increases. As we note in this blog post, a large unexpected increase in tariffs results in an aggregate supply shock to the economy. In terms of the basic aggregate demand and aggregate supply model that we discuss in Macroeconomics, Chapter 13 (Economics, Chapter 23), an unexpected increase in tariffs shifts the short-run aggregate supply curve (SRAS) to the left, increasing the price level and reducing the level of real GDP.
The effect of the tariffs poses a dilemma for the Fed. With inflation still running above the 2 percent annual target, additional upward pressure on the price level is unwelcome news. The dramatic decline in both stock prices and in the interest rate on the 10-Treasury note indicate that investors are concerned that the tariffs increases may push the U.S. economy into a recession. The FOMC can respond to the threat of a recession by cutting its target for the federal funds rate, but doing so runs the risk of pushing inflation higher.
In a speech today, Fed Chair Jerome Powell stated the following:
“We have stressed that it will be very difficult to assess the likely economic effects of higher tariffs until there is greater certainty about the details, such as what will be tariffed, at what level and for what duration, and the extent of retaliation from our trading partners. While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected. The same is likely to be true of the economic effects, which will include higher inflation and slower growth. The size and duration of these effects remain uncertain. While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent. Avoiding that outcome would depend on keeping longer-term inflation expectations well anchored, on the size of the effects, and on how long it takes for them to pass through fully to prices. Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.”
One indication of expectations of future cuts in the target for the federal funds rate comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) The data from the futures market indicate that, despite the potential effects of the surprisingly large tariff increases, investors don’t expect that the FOMC will cut its target for the federal funds rate at its May 6–7 meeting. As shown in the following figure, investors assign a 58.4 percent probability to the committee keeping its target unchanged at 4.25 percent to 4.50 percent at that meeting.
It’s a different story if we look at the end of the year. As the following figure shows, investors now expect that by the end of the FOMC’s meeting on December 9-10, the committee will have implemented at least four 0.25 percentage point (25 basis points) cuts in its target range for the federal funds rate. Investors assign a probability of 75.8 percent that the target range will end the year 3.25 percent to 3.50 percent or lower. At their March meeting, FOMC members projected only two 25 basis point cuts this year—but that was before the announcement of the unexpectedly large tariff increases.
This morning (February 7), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for January. This report was particularly interesting because it includes data reflecting the annual benchmark revision to the establishment, or payroll, survey and the annual revision of the household survey data to match new population estimates from the Census Bureau.
According to the establishment survey, there was a net increase of 143,000 jobs during January. This increase was below the increase of 169,000 to 175,000 that economists had forecast in surveys by the Wall Street Journal and bloomberg.com. The somewhat weak increase in jobs during January was offset by upward revisions to the initial estimates for November and December. The previously reported increases in employment for those months were revised upward by a total of 100,000 jobs. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”)
The BLS also announced the results of its annual revision of the payroll employment data benchmarked to March 2024. The revisions are mainly based on data from the Quarterly Census of Employment and Wages (QCEW). The data in payroll survey are derived from a sample of 300,000 establishments, whereas the QCEW is based on a much more comprehensive count of workers covered by state unemployment insurance programs. The revisions indicated that growth in payroll employment between March 2023 and March 2024 had been overstated by 598,000 jobs. Although large in absolute scale, the revisions equal only 0.4 percent of total employment. In addition, as we discussed in this blog post last August, initially the BLS had estimated that the overstatement in employment gains during this period was an even larger 818,000 jobs. (The BLS provides a comprehensive discuss of its revisions to the establishment employment data here.)
The following table shows the revised estimates for each month of 2024, based on the new benchmarking.
The BLS also revised the household survey data to reflect the latest population estimates from the census bureau. Unlike with the establishment data, the BLS doesn’t adjust the historical household data in light of the population benchmarking. However, the BLS did include two tables in this month’s jobs report illustrating the effect of the new population benchmark. The following table from the report shows the effect of the benchmarking on some labor market data for December 2024. The revision increases the estimate of the civilian noninstitutional population by nearly 3 million, most of which is attributable to an increase in the estimated immigrant population. The increase in the estimate of the number of employed workers was also large at 2 million. (The BLS provides a discussion of the effects of its population benchmarking here.)
The following table shows how the population benchmarking affects changes in estimates of labor market variables between December 2024 and January 2025. The population benchmarking increases the net number of jobs created in January by 234,000 and reduces the increase in the number of persons unemployed by 142,000.
As the following figure shows, the unemployment rate, as reported in the household survey, decreased from 4.1 percent in December to 4.0 percent in January. The figure shows that the unemployment rate has fluctuated in a fairly narrow range over the past year.
The establishment survey also includes data on average hourly earnings (AHE). As we’ve noted in previous posts, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage of being available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. AHE increased 4.1 percent in January, which was unchanged from the December increase. By this measure, wage growth is still somewhat higher than is consistent with annual price inflation running at the Fed’s target of 2 percent.
There isn’t much in today’s jobs report to change the consensus view that the Fed’s policymaking Federal Open Market Committee (FOMC) will leave its target for the federal funds rate unchanged at its next meeting on March 18-19. One indication of expectations of future rate cuts comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) As shown in the following figure, today these investors assign a probability of 91.5 percent to the FOMC keeping its target range for the federal funds rate unchanged at the current range of 4.25 percent to 4.50 percent at the March meeting. Investors assign a probability of only 8.5 percent to the FOMC cutting its target range by 25 basis points at that meeting.
Last September the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) cut its target for the federal funds rate by 0.50 percentage point (50 basis points. Many economists and policymakers expected the FOMC to continue cutting its federal funds rate target at meetings through 2025. (We discussed the September target cut in this blog post.) The FOMC cut its target by 25 basis points at both its November and December 2024 meetings. But by the December meeting, it had become clear that the inflation rate was not falling as quickly to the Fed’s 2 percent target as the committee members had hoped. As FOMC’s staff economists put it, there had been “upward surprises” in inflation data. According to the minutes of the December meeting, several members of the committee believed that “upside risks to the inflation outlook had increased.”
As a result, it seemed likely that the FOMC would leave its target for the federal funds rate unchanged at its next meeting on January 28-29. This conclusion was reinforced this morning (January 10) when the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for December. The report indicates that the labor market is stronger than expected.
Economists who had been surveyed by the Wall Street Journal had forecast that payroll employment, as reported in the establishment survey, would increase by 155,000. The BLS reported that payroll employment in December had increased by 256,000, well above expectations. The unemployment rate—which is calculated from data in the household survey—was 4.1 percent, down slightly from 4.2 percent in November. The following figure, taken from the BLS report, shows the net changes in employment for each month during the past two years.
As the following figure shows, the net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. The net change in jobs as measured by the household survey for December also showed a strong increase of 478,000 jobs following a decline of 273,000 jobs in November. In any particular month, the story told by the two surveys can be inconsistent with employment increasing in one survey while falling in the other. But in December the two surveys were sending the same signal of rapid employment growth. (In this blog post, we discuss the differences between the employment estimates in the household survey and the employment estimates in the establishment survey.)
The employment-population ratio for prime age workers—those aged 25 to 54—also increased, as shown in the following figure, to 80.5 percent in December from 80.4 percent in November. Although the employment-population is below its recent high of 80.9 percent, it remains high relative to levels seen since 2001.
As the following figure shows, the unemployment rate, which is also reported in the household survey, decreased slightly to 4.1 percent in December from 4.2 percent in November. The unemployment rate has been remarkably stable over the past two years, varying only 0.2 percentage point above or below 4.0 percent.
The establishment survey also includes data on average hourly earnings (AHE). As we noted in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage that it is available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. The AHE increased 3.9 percent in December, down slightly from 4.0 percent in November.
The following figure shows wage inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month wage inflation, whereas this figure shows 1-month wage inflation.) One-month wage inflation is much more volatile than 12-month wage inflation—note the very large swings in 1-month wage inflation in April and May 2020 during the business closures caused by the Covid pandemic. The December 1-month rate of wage inflation was 3.4 percent, a decline from the 4.9 percent rate in November. Whether measured as a 12-month increase or as a 1-month increase, AHE is still increasing somewhat more rapidly than is consistent with the Fed achieving its 2 percent target rate of price inflation.
Given these data from the jobs report, it seems unlikely that the FOMC will reduce its target range for the federal funds rate at its next meeting. One indication of expectations of future rate cuts comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) As shown in the following figure, today these investors assign a probability of 97.3 percent to the FOMC keeping its target range for the federal funds rate unchanged at the current range of 4.25 percent to 4.50 percent, at its next meeting. Investors assign a probability of only 2.7 percent of the committee cutting its target range by 25 basis points at that meeting.
As the following figure shows, investors also expect the FOMC to keep its target range unchanged at its meeting on March 18-19, although there is greater uncertainty. Investors assign:
A 74.0 percent probability that the FOMC keeps its target range for the federal funds rate unchanged
A 25.4 percent probability that the committee cuts its target range by 25 basis points
A 0.6 percent probability that the committee cuts its target range by 50 basis points
As we discussed in this post, most recent data are consistent with the labor market having cooled, which should reduce upward pressure on wages and prices. On Friday morning, the Bureau of Labor Statistics (BLS) released its employment report for August 2023. (The report can be found here.) On balance, the data in the report are consistent with the labor market continuing to cool.
Data from the establishment survey showed an increase in payroll employment of 187,000, which is close to the increase of 170,000 economists surveyed by the Wall Street Journal had forecast. The following figure shows monthly changes in payroll employment since January 2021.
Although the month-to-month changes have been particularly volatile during this period as the U.S. economy recovered from the Covid–19 recession, the general trend in job creation has been downward. The following table shows average monthly increases in payroll employment for 2021, 2022, and 2023 through August. In the most recent three-month period, the average monthly increase in employment was 150,000.
Period
Average Monthly Increases in Employment
2021
606,000
2022
399,000
Jan.-Aug. 2023
236,000
The BLS revised downward its previous estimates of employment increases in June and July by a combined 110,000. The changes to the estimate of the employment increase for June are particularly notable. As the following graph shows, on July 7, the BLS initially estimated the increase as 209,000. The BLS’s first revision on August 4, lowered the estimate to an increase of 187,000. The BLS’s second revision on September 1, lowered the estimate further to 105,000. In other words, the BLS now estimates that employment increased by only half as much in June as it initially reported. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1 and Essentials of Economics, Chapter 13, Section 13.1), the revisions that the BLS makes to its employment estimates are likely to be particularly large when the economy is about to enter a period of significantly lower or higher growth. So, the large revisions to the June employment estimate may indicate that during the summer economic growth slowed and labor market conditions eased.
Data from the household survey showed the unemployment rate increasing from 3.5 percent in July to 3.8 percent in August. The following figure shows that the unemployment rate has fluctuated in a narrow range since March 2022. Employment as estimated from the household survey increased by 222,000. The seeming paradox of the number of people employed and the unemployment rate both increasing is accounted for by the substantial 736,000 increase in the labor force.
Finally, as the first of the following figures shows, measured as the percentage change from the same month in the previous year, the increase in average hourly earnings (AHE) remained in its recent range of between 4.25 and 4.50 percent. That rate is down from its peak in mid-2022 but still above the rate of increase in 2019, before the pandemic. But, as the second figure shows, if we look at the compound rate of increase in AHE—that is the rate at which AHE would increase for the year if the current rate of monthly increase persisted over the following 11 months—we can see a significant cooling in the rate at which wages are increasing.
As a reminder, AHE are the wages and salaries per hour worked that private, nonfarm businesses pay workers. AHE don’t include the value of benefits that firms provide workers, such as contributions to 401(k) retirement accounts or health insurance. As an economy-wide average they suffer from a composition effect during periods in which employment either increases or decreases substantially because the mix of high-wage and low-wage workers may change. AHE are also subject to significant revisions. Therefore, short-range changes in AHE can sometimes be misleading indicators of the state of the labor market.
(Photo from the Associated Press via the Wall Street Journal.)
During most periods, the “Employment Situation” report that the Bureau of Labor Statistics issues on the first Friday of each month includes the most closely watched macroeconomic data. Since the spring of 2021, high inflation rates have made the BLS’s “Consumer Price Index Summary” at least a close second in interest to the employment report. The data in the CPI report is usually more readily comprehensible than the data in the employment report. So, we think it’s worth class time to go into some of the details of the employment report, as we do in Macroeconomics, Chapter 9, Section 9.1, Economics, Chapter 19, Section 19.1, and Essentials of Economics, Chapter 13, Section 13.1.
When the BLS released the May employment report, the Wall Street Journal noted that: “Employers added 339,000 jobs last month; unemployment rate rose to 3.7%.” Employment increased … but the unemployment rate also rose? How is that possible? One key to understanding media accounts of the report is to note that the report contains data from two separate surveys: 1) the household survey and 2) the employment or establishment survey. As in the statement just quoted from the Wall Street Journal, media accounts often mix data from the two surveys.
The data showing an increase of 339,000 jobs in May are from the payroll survey, while the data showing that the unemployment rate rose are from the household survey. Below we reproduce part of the relevant table from the report showing some of the data from the household survey. Note that total employment in the household survey falls by 310,000, so there appears to be no contradiction to explain—the unemployment rate increased because the number of people employed fell and the number of people unemployed rose. But why, then, did employment rise in the payroll survey?
Employment can rise in one survey and fall in the other because: 1) the types of employment measured in the two series differ, 2) the periods during which the data are collected differ, and 3) because of measurement error. The household survey uses a broader measure of employment that includes several categories of workers who are not included in the payroll survey: agricultural workers, self-employed workers, unpaid workers in family businesses, workers employed in private households rather than in businsses, and workers on unpaid leave from their jobs. In addition, the payroll employment numbers are revised—sometimes substantially—as additional data are collected from firms, while the household employment numbers are subject to much smaller revisions because data in the household survey are collected during a single week. A detailed discussion of the differences between the employment measures in the two series can be found here.
Usefully, the BLS publishes a series labeled “Adjusted employment” that estimates what the value for household employment would be if the household survey was measuring the same categories of employment as the payroll survey. In this case, the adjusted employment series shows an increase in employment in May of 394,000—close to the payroll survey’s increase of 339,000.
To summarize, the May employment report indicates that payroll employment increased, while the non-payroll categories of household employment declined, and the unemployment rate rose. Note also in the table above that the number of people counted as not being in labor force rose slightly and the employment-population ratio fell slightly. Average weekly hours (not shown in the table above) decreased slightly from 34.4 hours per week to 34.3.
A reasonable conclusion from the report is that the labor market remains strong, although it may have weakened slightly. Prior to release of the report, there was much speculation in the business press about how the report might affect the deliberations of the Federal Reserve’s Federal Open Market Committe (FOMC) at its next meeting to be held on June 13th and 14th. The report showed stronger employment growth than economists surveyed by Dow Jones had expected, indicating that the FOMC was likely to remain concerned that a tight labor market might continue to put upward pressure on wages, which firms could pass through to higher prices. Members of the FOMC had been signalling that they were likely to keep their target for the federal funds rate unchanged in June. The reported employment increase was likely not large enough to cause the FOMC to change course.
Leisure and hospitality was one of the industries showing surprisingly strong job growth during January 2022. Photo from the New York Times.
The Bureau of Labor Statistics’ monthly report on the “Employment Situation” is generally considered the best source of information on the current state of the labor market. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (and in Economics, Chapter 19, Section 19.1), economists, policymakers, and investors generally focus more on the establishment survey data on total payroll employment than on the household survey data on the unemployment rate. The initial data on employment from the establishment survey are subject to substantial revisions over time (we discuss this point further below). But the establishment survey has the advantage of being determined by data taken from actual payrolls rather than by unverified answers to survey questions, as is the case with the household survey data.
The establishment survey data for January 2022 (released on February 4, 2022) showed a surprisingly large increase in employment of 467,000. The consensus forecast had been for a significantly smaller increase of 150,000, with many economists expecting that the data would show a decrease in employment. The establishment survey is collected for pay periods that include the 12th of the month. In January 2022, in many places in the United States that pay period coincided with the height of the wave of infections from the Omicron variant of Covid-19. And, in fact, according to the household survey, the number of people out of work because of illness was 3.6 million in January—the most during the Covid-19 pandemic. So it seemed likely that payroll employment would have declined in January. But despite the difficulties caused by the pandemic, payroll employment increased substantially, likely reflecting firms’ continuing high demand for workers—a demand reflected in the very high level of job openings.
The employment report includes the BLS’s annual data revisions, which are based on a comprehensive payroll count for a particular month in the previous year—in this case, March 2021. The revisions also incorporate changes to the BLS’s seasonal adjustment factors. Each month, the BLS adjusts the raw payroll employment data to reflect seasonal fluctuations such as occur during and after the end-of-year holiday period. For instance, the change from December 2020 to January 2021 in the raw employment data was −2,824,000, whereas the adjusted change was 467,000 (as noted earlier). Obviously this difference is very large and is attributable to the BLS’s seasonal adjustments removing the employment surge in December attributable to seasonal hiring by retail stores, delivery firms, and other businesses strongly affected by the holidays.
The changes to the seasonal adjustment factors made the revisions to the 2021 payroll employment numbers unusually large. For instance, the BLS initially reported that employment increased from June 2021 to July 2021 by 1,091,000, whereas the revision reduced the increase to 689,000. Table A below is reproduced from the BLS report; the figure below the table shows the changes in employment from the previous month as originally published and as revised in the January report. Overall, the BLS revisions now show that employment increased by 217,000 more from 2020 to 2021 than initially estimated. The BLS expressed the opinion that: “Going forward, the updated models should produce more reliable estimates of seasonal movements. [Because there are now] more monthly observations related to the historically large job losses and gains seen in the pandemic-driven recession and recovery, the models can better distinguish normal seasonal movements from underlying trends.”
Source: The BLS “Employment Situation” report can be found here.
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