Weak Payroll But Impressive Wage Increase

The last BLS jobs report for 2021 paints a mixed picture. On the one hand, payroll growth was weaker than expected, with employers reporting that they added just 199,000 jobs. But wage increases were very impressive, indicating that the labor market continued to be tight – at least before the omicron virus spread. And households reported impressive gains in employment as well.

Payrolls rose in most sectors, but by somewhat less than economists expected. Leisure and hospitality payrolls grew by 53,000 but remain 1.2 million below their pre-pandemic levels – indicating that the difficulty of hiring and retaining workers in this sector continues. Professional service jobs grew by 43,000, manufacturing by 26,000 and construction by 22,000. But retail employment was flat and government employment mildly declined.

At the same time, wage growth was very striking: average hourly wages rose by 19 cents, the largest increase observed in years. On an annualized basis, this increase amounts to 7.3%. The actual increase observed over the past 12 months is 4.7%. These are impressive wage increases. Though recent inflation has been even higher, thus denying workers an increase in “real wages,” the numbers imply ample improvements if inflation subsides while labor markets remain tight.

And on the household side, employment rose as well. The unemployment rate dropped to 3.9%, and the numbers of workers reporting employment rose by 650,000. Labor force participation increased modestly, rising for women but declining somewhat for men. The rise for women is a welcome gain, as their labor force activity has been flat for much of the past year.

Why is there such a large discrepancy between payroll growth of about 200,00 and employment growth of 650,000? It might be that many more employed people are self-employed or working informally, in ways not captured by the payroll numbers. On the other hand, in any one month, the two surveys might deviate somewhat – while they track each other better over longer periods.

Either way, the numbers suggest a labor market that has remained quite tight through the end of the year. Impressive wage gains suggest that employers still have difficulty filling job slots or keeping them filled, as quit rates remain very high.

The omicron virus might throw a monkey wrench into this picture in 2022. But 2021 ends on a decent note, despite the disappointingly small rise in payroll jobs.

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