Another very good report on the direction of the labor market. Non-farm payrolls increased 252,000 in December and were revised up 50,000 for prior months, with all of the upward revision coming from the private sector. Overall, non-farm payrolls grew 2.95 million in 2014, the best year since 1999. Meanwhile, the unemployment rate fell to 5.6 percent, the lowest so far in the recovery and barely above where the Federal Reserve pegs the long-term average in a “normal” economy.
In a way, today’s report is the labor market in a nutshell. Where employers still have wide discretion, the labor market is improving rapidly: Jobs are increasing at a robust clip. Where the government is interfering with the labor market, we have stagnation. So, for example, the new health-care system is forcing companies to spend more on health-care, which means less money left over for higher wages. And in the past year, despite the big drop in the unemployment rate, wages are up a tepid 1.7 percent (not including fringe benefits such as health care or tips, irregular bonuses, or commissions). Meanwhile, on top of an aging population, we have easily obtainable disability benefits and overly generous aid to students, so the labor-force-participation rate remains at its lowest level since New Yorkers were lining up for Studio 54.
Even the details tell a story of government interference, although one that’s finally receding. Extended unemployment benefits ended at the start of 2014, and right on cue the median duration of unemployment plummeted, ending the year at 12.6 weeks versus 17 weeks a year ago.
Although average hourly wages fell 0.2 percent in December, we aren’t worried about workers’ purchasing power. It looks like consumer prices fell about 0.4 percent in December, so “real” (inflation adjusted) earnings were likely still up. Also, even without adjusting for prices, total hours were up in December, so total cash earnings were unchanged, and up 5 percent from a year ago.
Despite modest inflation, the strength in the labor market supports our forecast that the Fed will start raising short-term rates in the second quarter of next year. Non-farm payrolls increased 246,000 per month in 2014, while civilian employment — an alternative measure of jobs that includes small-business start-ups — rose 231,000 per month. We expect more even more job growth, less unemployment, and (finally!) faster wage growth in the year ahead.