MNI INTERVIEW: Job Market Progress May Be Rocky -Fed Economist

The U.S. economy is more likely than not to have seen robust hiring in May, but another disappointing payrolls number Friday could indicate structural changes facing the labor market could pose a bigger challenge than thought, Richmond Fed senior adviser Thomas Lubik told MNI.

At the moment Lubik remains "cautiously optimistic" of new jobs in the 600,000 to 700,000 range in May and that April's shockingly low 266,000 payrolls figure will be revised upward.

But increased automation, a shift to e-commerce and decline in business travel are among forces reshuffling the types of jobs and skills in demand after the Covid-19 pandemic. They exacerbate existing challenges of matching workers who lost their jobs during the crisis to new vacancies, and could portend a more prolonged recovery, Lubik warned in an interview Wednesday.

APRIL SHOCKER

The April employment report "came as a big surprise" -- one of the biggest of his career, he said.

"I still think April will be upgraded based on the incredibly strong labor demand. We know there are labor shortages, and labor demand is as high as it's ever been," he said. "But it seems like the easy gains in employment that we had seen over the last six to nine months are past us, and we now have to work through the remaining job losses."

The labor market recovery is still "broadly on track" to regain its pre-pandemic level of health by the end of next year, but "the employment-to-population ratio has to come back substantially" for the Fed to pull back policy support, Lubik said.

That requires a return of millions of workers to the jobs market. The labor force participation rate is trending upward but at 61.7% in April is still 1.6 pp short of its February 2020 level. The prime age participation rate, which roughly excludes the 2 million people who retired during the pandemic, is also down 1.6 pp. EPOP is 3.2 pp below its pre-Covid level, having recovered just 0.5 pp since December.

"We really don't quite know yet" whether older workers and women will return to work. Some people are still not convinced the virus is under control and waiting to jump back in, while the expanded federal unemployment benefits and other government payouts have boosted savings and played a role in decisions to stay home, Lubik said.

PERMANENT CHANGE TO EXPECTATIONS?

As half of U.S. states have now said they would cut off an extra $300 a week in unemployment pay by the end of the month, "we could see fairly quickly (the impact on hiring) in the individual state data," he said.

But it is possible that the additional support may have permanently changed workers' expectations, part of a broader "rethinking among all sectors in the economy on how to do business in a better way," he said.

For workers, "the previous low wage job may not look as attractive, and this may actually play out over the longer term" in terms of ratcheting up wages and inflation expectations, he said. For firms, changing shopping and travel habits also mean investing in machines and hiring people with different skills.

"If the May employment report continues to disappoint on the downside, I'd give more credence to structural change argument," he said.