Cooling? Or Red-Hot? Psst Labor Market

I am not going to put Preston Mui’s entire Labor Market Recap May 2024: Still Cool report from Employ America up on Angry Bear. Most of all, I wanted his summation of what he was seeing. He gives up his reasoning as to why the two surveys differ.

It is an easy read if you wish to indulge. He would probably appreciate the reading of his commentary like we at Angry Bear enjoy your reading it and comments. No place for comments. In entirety, it is a good read.

Labor Market Recap May 2024: Still Cool

by Preston Mui

Employ America

A lot has been made of the difference between the household survey and the establishment survey. If one looks at the household survey, the story is of a labor market that is strong in terms of levels, but progress is slowing (or even stagnant, depending on the time frame and measure). If one looks at payroll gains, the labor market looks red-hot.

The debate over which survey to trust mainly focuses on the discrepancy between the employment counts in the two surveys. The household survey has shown persistently lower employment counts than the establishment survey. A number of theories have arisen to try to explain the difference, such as poor modeling of birth-death rates in the establishment survey or underweighting of immigrants in the household survey.

For the question of “how hot is the labor market,” this discrepancy is a little besides the point. As Jason Furman points out in a very clarifying thread, the pace of job growth alone does not tell us if the labor market is tight or not. What matters is whether or not we’re adding enough jobs to keep the labor market at its current level of tightness. The fact that the unemployment rate has steadily increased in recent months is a sign that we are not, and that the labor market is cooling.

Put differently, the primary argument for why the household survey gets employment wrong is undercounting immigrants, which is an argument that the household survey has the population base wrong. But for measures like the unemployment rate, prime-age employment rates, and labor force participation, this is less of a problem. Even if immigrants are underweighted in the household survey, you can still think of the reported unemployment rate as a crudely demographically-adjusted measure of the real unemployment rate (adjusted to the pre-immigration surge trend).

A red-hot labor market is also inconsistent with the other data points we have. It’s hard to conclude the labor market is red-hot when the number of unemployed job losers is on the rise (a household survey measure that ought to be underestimated if immigrants are underestimated), a steady fall in hiring and quit rates, and lower wage growth. The totality of the evidence points more towards a cooling (but still good!) labor market than heating up, despite the payroll prints.