KEY DATA: Productivity: +5.4%; Hourly Compensation: +5.1%; Labor Costs: -0.3%/ Claims: -92,000/ Layoffs: 22,913
IN A NUTSHELL: “Businesses will have to keep improving productivity as the labor market is tightening faster as well.”
WHAT IT MEANS: Tomorrow we get the government’s report on April job gains and it should be massive. Despite hiring lots of workers, businesses managed to find a way to make them a lot more productive. Productivity surged in the first quarter at the second fastest rate in eleven years. The only time it increased faster was in the second quarter of last year, when the economy started opening up. But a year ago, hiring was muted. Now, payrolls are booming, but so is productivity. Businesses are getting a lot more out of their new workers, which they need to since compensation is also surging. That has kept labor costs under control. Hiring should remain strong through the summer, but don’t look for productivity to keep pace, so there is a risk that firms see their labor costs rise, further pressuring prices.
Indeed, the risk to businesses is that they cannot find enough workers and are forced to bid for them. New unemployment claims dropped sharply last week. With most states either already fully reopening or announcing plans to do so by summer, the improvement in the unemployment situation should continue unabated.
Supporting the view of an ever-tightening labor market was the April Challenger, Gray and Christmas layoff announcement report. The number fell and is now where it would likely be in a strong economy. Firms are holding onto their workers tightly as they are having real problems replacing them if they leave.
IMPLICATIONS: The good news is that job growth is strong and layoffs are falling significantly. The bad news, for businesses but not for workers, is that the labor market is getting really tight. A big problem is that over sixteen million workers are still receiving unemployment assistance. With demand for workers skyrocketing but so many people finding it more beneficial to get a government check than a business paystub, the labor market tightening is not going away anytime soon. The “shortage” of workers will likely remain extreme until the enhanced unemployment benefits run out in September. But the high number of workers on special unemployment programs points out the problem that wages in a wide variety of sectors and professions are extremely low. For many small business owners, the ability to raise wages is limited. But they will have to. For those who can, by raising starting salaries or wages, they are making the point that a higher worker minimum wage is affordable. Actually, many have already put the minimum wage in the rear-view mirror. The political debate over raising the minimum wage comes down to weighing the costs to those firms who cannot afford significantly higher labor costs against the reality that workers cannot live on the minimum wage or close to it. The administration is on one side, the business sector is largely on the other. With so many firms already starting workers well above the minimum, and many more being forced to due to market conditions, $7.25/hour seems like a strange number to be defending. There should be a compromise that changes the status quo, but in this political environment, even logical actions become nonstarters.