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MATCH GAME

The May jobs report won’t shake the Fed off course

A waiter sets up tables in front of a restaurant in New York City.
Reuters/Carlo Allegri
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  • Tim Fernholz
By Tim Fernholz

Senior reporter

Published Last updated on

The US labor market expanded briskly in May, adding 559,000 jobs as the unemployment rate declined to 5.8%.

Though more jobs are always better, this report underscores that the US is not facing a labor shortage, but simply recovering from a severe economic shock. There is a ways to go: Economists estimate the US is nearly 8 million jobs behind the level of employment that would have been reached absent the recession.

In March, the Federal Reserve predicted the US would end 2021 with a 4.5% unemployment rate. To reach that goal, employers will need to add about 4.5 million jobs over the rest of the year as the labor force returns to the levels it reached before the pandemic. That’s about 647,000 jobs a month for the rest of the year—which means this month is ok, but another April, where the US gained 278,000 jobs, would be a bad sign.

Forecasters seemed to underestimate how long it would take for the pandemic to unwind, but we can see it happening in the data: Importantly, 1.5 million fewer people reported being unable to work because their employer was closed due to the pandemic in May compared to April. That’s a major sign that vaccines are making workers confident and helping reopen businesses.

But 7.9 million Americans are still lacking jobs or working less because of the pandemic, which leads economists concerned with full employment to argue that the Fed should continue its efforts to provide cheap credit and support the economy as temporary fiscal stimulus continues to subside.

Look once again to the restaurants

The story about restaurants being unable to find workers still lacks support—292,000 jobs were created in the leisure and hospitality sector in May, with 186,000 coming at restaurants and bars. There are still a lot of gaps to fill, with the sector still 11% below its pre-pandemic employment level.

All eyes have been on wages—the Fed wants to see evidence of wages rising before it begins to tighten policy, while those who fear rampant inflation already see wages rising inexorably. This isn’t the case so far—leisure and hospitality wages for workers increased just one cent last month, after rising 42 cents in April. (That bolsters the argument that the boost may simply be due to the return of tipping customers to restaurants.)

That’s why JPMorgan analyst Mike Bell called this report a “goldilocks scenario of a labor market recovery that is not too cold to raise concerns about the economy, but not too hot to prompt fears about faster than expected monetary policy tightening.”

Matching workers to jobs

The second largest source of new jobs tracked in this report is in public and private education. Teachers are going back to work as in-person school becomes more prevalent, but of course many American schools close for the summer. Another large boost in jobs is expected in the fall as more teachers return to work, which is reflected in the statistics. There are more than half a million fewer local educators employed now than at the start of the pandemic, and another half a million jobs missing at the state level and at private schools.

That highlights that the economy is in a state of transition, and patience is in order.

As workers and employees try to match up, expectations for treatment and salaries have changed, but so have those about the fundamentals of the workplace. More than half of job seekers at the website ZipRecruiter want to work remotely, but only 10% of employers offered that option, an economist there told the New York Times.

It will take time for all this to sort out, and that’s not necessarily a bad thing. Researchers Ammar Farooq, Adriana Kugler, and Umberto Muratori argue that generous unemployment benefits help workers find the best match for their skills, which increases the overall productivity of the economy. Instead of taking the first job they can get, even if it doesn’t let them do their best work, workers can be more selective and find a place where they can thrive.

Debates over the pace of the labor market recovery have often blamed workers for not returning quickly enough, even if their old workplace is still closed, they worried about a Covid-19 infection, they had the ability to wait for a better job, or lacked of childcare. That view assumes policymakers should aim to ensure a workforce that has no agency, but workers deserve the power to say “no.”

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