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What Challenges Does The Labor Market Face?

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RANDY FREDERICK: The May employment reports which were released last Friday included some good news and some not-so-good news. Liz Ann Sonders, Schwab’s chief investment strategist, joins me for the June 7 Schwab Market Snapshot to give us her take on the labor market and what challenges may lie ahead. Welcome back, Liz Ann.
LIZ ANN SONDERS: Thanks, Randy. And thanks, everybody, for tuning in.
RANDY: So, Liz Ann, I know you wrote about the labor market in your most recent Insights column. So can you give us your take on last Friday’s report and what it may be telling us about the economy?
LIZ ANN: Sure. So quickly on the details of the report. The payroll gains were a bit weaker than expected, but the unemployment rate did tick down. And it highlights what we know when you look at the map, which is the payroll gains are more than enough to continue to bring the unemployment rate down—suggesting that the labor market has gotten fairly tight.
And another testament to that view would be more recent data that came out that’s called JOLTS, which is Job Opening and Labor Turnover Survey. And it showed a record high number of job openings right now. Although, the hiring rate has rolled over a little bit—maybe the reason why you saw lower payroll gains.
But the interesting reason behind that is that we really developed a skills gap—a lot of job openings, a lot of workers looking for jobs that don’t have the skills. But it does highlight this tightness in the labor market that I think the headlines around last Friday maybe didn’t provide significantly enough.
RANDY: Well, let’s talk a little bit about wages, because wage growth is something that has been noticeably weak during the current economic expansion. Can you tell us why some of the more traditional measures may not be giving us the full picture?
LIZ ANN: Sure. So average hourly earnings is the common way we measure wages. In fact, it’s the data point that comes out with the Jobs Report every fourth Friday, and it’s shown fairly tepid wage growth of about 2½ percent. But there’s something kind of fishy—not fishy in the numbers—but the calculation, I think, is important, the fact that it’s a simple average.
So, for instance, if you go back to 2009, during the Great Recession when we were seeing hundreds of thousands of jobs lost. More of those jobs were on the lower end of the wage spectrum. So what happens when you have a large number, you take a bunch of the lower readings out of that set of numbers, the average goes up. That was happening during the Great Recession.
The opposite has been happening in the last few years—more entrants back into the workforce, as they get jobs, are on the lower end of the wage spectrum. So I think the math has depressed that average number. Which is why there are alternate measures—that economists look at, that the Fed looks at—including one put out by the Atlanta Fed called the Wage Tracker. It’s considered a median measure in that it only looks at people in the workforce for the full 12-month measurement period. So it eliminates some of the mix-shift problems of average hourly earnings. And, for what it’s worth, that measure shows, instead of 2½ percent wage growth--3½ percent wage growth.
RANDY: Well, that’s really interesting. But aside from weak wages, another thing that we’ve also seen is a falling of inflation expectations, and of course, that’s resulted in a flattening of the yield curve. So let’s talk a little bit about the bond market. Is the bond market giving us any kind of warning signs about the equity markets or about the economy?
LIZ ANN: So this is a question I’ve been getting a lot recently from many of our clients, saying, “Are the bond market and stock market telling two different stories about the economy?” And we don’t really think that that’s the case, because most of the decline in treasury yields has been a decline in what they call the term premium—which reflects what’s happening in inflation.
So the decline in yields is not sending a signal of impending doom for the economy. It’s just showing waning risk of inflation. That, in turn, is also a positive for the stock market. Still, at least trend growth in the overall economy, but lower inflation pressure and possibly less pressure from the Fed. So I think, actually, the stories they’re telling are not contradictory.
RANDY: Yeah, that’s really interesting, Liz Ann. Unfortunately, we’re already out of time. Thank you so much.
Listen, if you want to read more from Liz Ann, you can do that in the Insights section of, and you can follow Liz Ann on Twitter @LizAnnSonders. And, of course, you can always follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.

Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.
Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.
Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk.
Investing involves risk including loss of principal.
The Job Openings and Labor Turnover Survey (JOLTS) program produces data on job openings, hires, and separations.


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