The April Employment Report

May 8, 2006 – According to Friday’s data release, U.S. payroll employment rose by 138K in April following a revised 200K March increase. Despite softer April growth, payroll employment remained on a stable trend – rising by 1.5% in April compared to the same month last year (Chart 1). This twelve-month trend in payroll growth has been running at 1.5% for the last six months.

Chart 1. Payroll employment. Year-ago percent change. January 1987 through April 2006.

The unemployment rate was unchanged at 4.7% in April (Chart 2). That’s a half percentage point below the Congressional Budget Office’s 5.2% estimate of its full employment level. Thus, the unemployment rate continues to suggest a relatively tight labor supply.

Chart 2. The unemployment rate. Actual versus full employment. January 1987 through April 2006.

At the same time, the lack of a cyclical recovery in the labor force participation rate continues to suggest that the unemployment rate might be understating the economy’s untapped labor supply. The labor force participation rate was unchanged at 66.1% in April – and it has been ranging between 66% and 66.2% for the last 13 months. At the trough of the last recession, this rate was 66.7% – 0.6 percentage points higher than it was in April.

In contrast, the accelerating trend in average hourly earnings lends some support to fears of inflationary overheating in the labor market (Chart 3). Average hourly earnings rose by 3.8% in April, compared to the same month last year. In January, this 12-month increase was a half percentage point lower at 3.3%. In April last year, it was 1.1 percentage points lower at 2.7%.

Chart 3. Nominal and real average hourly earnings. Year-ago percent change. January 1987 to date.

Through Q1, however, the impact of faster earnings growth on firms’ production costs was largely offset by higher productivity. Nonfarm businesses’ labor productivity (output per hour worked) rose by 2.4% in Q1, compared to the same period last year, and their unit labor costs (productivity adjusted hourly labor compensation costs) rose by a modest 1.4% – slowing from a 3.4% year-ago increase in Q1 last year (Chart 4).

Chart 4. Unit labor costs. Year-ago percent change. Q1 1987 through Q1 2006.

As of March, the 12-month gain in real hourly earnings remained near zero (see Chart 3). Yet, the ongoing boom in real non-financial corporate profits through Q4 suggests that U.S. firms can easily afford to pay more income to their workers without raising their prices (Chart 5).

Chart 5. Real corporate profits. Year-ago percent change. Q1 1987 through Q1 2006.

Suzanne Rizzo

Sources:

U.S. Department of Labor, Bureau of Labor Statistics (http://www.bls.gov) - payroll employment, the unemployment rate, the labor force participation rate, average hourly earnings, labor productivity and unit labor costs.
The Congressional Budget Office (http://www.cbo.gov) - the “full employment” unemployment rate (also known as the “NAIRU” or the “natural” rate of unemployment).
U.S. Department of Commerce, Bureau of Economic Analysis (http://www.bea.gov) - the chained price index for personal consumption expenditures (the chained PCE price index), corporate profits from current production (also known as “economic profits”) and the chained GDP price index.
National Bureau of Economic Research (http://www.nber.org) - recession dates.