Strong job and wage gains continue in this historically unique expansion
Payrolls rose a strong 254,000 last month, well above expectations for about 150,000 more jobs, and the unemployment rate fell to 4.1% from 4.2% in August—also beating expectations. Cumulative upward revisions of 72,000 to July and August raise the average monthly gains over the past three months to a healthy 186,000. Also in today’s report, wage growth was a strong 4% year-over-year and 0.4% on a monthly basis. Though we do not yet have inflation data for September, in August the CPI was up 2.5% on a yearly basis, which suggests that September will continue the 16-month series of wage growth outpacing price growth.
In this post, we return to a well the CEA has often drawn from: unique aspects of this post-pandemic recovery. This morning’s employment report shows that since its historically low trough of 3.4% in April of last year, the unemployment rate has increased by 0.7 percentage points.
At the same time, other indicators signal more economic strength—which was not the case in similar periods when unemployment rose from its low point. Unemployment insurance claims are low, real GDP has outpaced expectations, payrolls and labor force growth has been strong, and real wages and incomes are rising. Below we dig into some of these indicators, putting them in historical perspective.
Figure 1 compares percentage point increases in unemployment from its low-point prior to five different periods.[1] The current unemployment rate increase—from 3.4% in April 2023 to 4.1% in September 2024—ranks at the bottom of the pack. Moreover, that recent increase started from a uniquely low level of 3.4% (see figure legend for each period). A recent the CEA blog post puts this measure in additional context.
Figure 2 shows another measure of labor market strength—growth in continued claims from unemployment insurance (UI) data. Here, and in subsequent figures, changes are plotted for the same time periods as in Figure 1. Claims have hardly budged at all over the past year, in contrast to earlier business cycles when they rose (typically sharply) going into recessions. To be clear, unemployment claims measure a different population than the unemployment rate in Figure 1. Most unemployed workers do not receive UI benefits,[2] meaning that differences between recipients and non-recipients can make the path of UI claims different than that of the overall unemployment rate.
We next track payroll employment growth, up 254,000 in September. See Figure 3. With two exceptions—the current and the 1989 periods—payroll growth slowed and even turned negative when the jobless rate was rising.
This raises the question of why, as payrolls continue to grow, has the unemployment rate climbed over the last year and a half? The answer is embedded in the concept of the “breakeven rate”: the estimated payroll growth needed each month to hold the unemployment rate constant. Intuitively, an expanding labor force means that some net job growth is needed to keep unemployment from rising, i.e., to provide jobs for new labor market entrants. Before the pandemic, most estimates of breakeven were in the range of 70-100,000 jobs per month.
But calculating the breakeven number in the current moment is difficult, for several reasons. First, if the labor force grows faster than expected, that raises the breakeven rate, and vice versa. Second, immigration flows can have similar effects. Third, an esoteric measurement issue means that the survey providing the unemployment rate (the CPS) has shown less employment growth than the employer survey (the CES) that provides payroll employment estimates. Given all of these sources of uncertainty, the CEA believes the current breakeven could be anywhere within a wide range from 100,000 to 200,000 jobs per month.
Looking outside the labor market, a broader set of macroeconomic variables tells a positive story about the economy. Private domestic final purchases (PDFP), comprising consumer spending and business investment, tends to be a reliable indicator of the path of the overall economy and is closely related to the better-known GDP. Figure 4 shows how PDFP per person is growing strongly in the current period, in stark contrast to past periods of rising unemployment.
The CEA has long emphasized the importance for workers and the broader economy of rising real wages. Figure 5 now shows after-tax income per capita, which is also outpacing past periods of rising unemployment.
To better assess the whole basket of relevant business cycle indicators, Figure 6 uses a statistical technique (dynamic factor analysis) to assess the state of the expansion. That basket includes real personal income, real consumption, real retail and wholesale sales, payroll employment, industrial production, and household employment. Negative movements in this common factor signal deteriorating conditions, and positive movements signal improving conditions. Here again, in contrast to other periods, this common factor has only slightly declined from its level of April 2023.
Historically, sufficiently large increases in the unemployment rate often accompany recessions—a regularity known as the Sahm Rule. Many economists, including Claudia Sahm herself, point out that the current period appears to be an exception to this regularity. The figures above underscore this point, but they also prompt us to consider what it is about the current cycle that explains this divergence. One clue is in the minimum unemployment rates shown in the legend of Figure 1. Though unemployment has gone up enough to trigger the Sahm rule, it has done so from an unusually low level, and today’s jobless rate—4.1%—is still quite low, at the 16th percentile of monthly unemployment rates since 1990.
Of course, the CEA will carefully watch the evolution of these variables as we gauge the extent of labor market cooling. But thus far, the current recovery has proved to be both remarkably strong and resilient.
[1] For each period other than 2023-24, we find the month in which the unemployment rate was at its minimum prior to an NBER downturn. We exclude the pandemic recession in this analysis.
[2] There are a variety of reasons for low UI recipiency, including the ineligibility of those who quit their jobs, those without sufficient recent earnings history, and those who exhaust their UI benefits.
