The American labour market

June 2, 2007

The   latest American data on unemployment and job growth shows that the rate of unemployment remains low at 4.5 % and more jobs were created last month than many analysts expected. The Fed has kept its benchmark rate at 5.25 % and despite the drop in home values and the sharp slowdown in manufacturing and construction in the past year the economy is holding its own.
The services and retail sectors, including restaurants, bars, the financial sector and health care have been expanding in terms of jobs and manufacturing grew at its fastest rate in a year.

Average hourly wages have been stagnant however since 2001. In 2001 the real average hourly wage was $17.24 . In 2007 it is $17.30. (See Jeremy Peters "Surging Jobs Seen as Sign of Rebound "   New York Times p.C1, June 2, 2007)

Clearly the conditions of globalization are responsible for this stagnation in real wages. In addition as the American dollar falls against other world currencies the purchasing power of the American wage internationally has also fallen. But since many Americans do not travel and the economy is only 10 % dependent upon imports the impact of this fall in value is minimized.

So the US economy on a war footing with its small deficit, moderately high interest rates, low inflation-the core rate April to April was 2 %- while far from booming is also holding its own. That could change if aggregate demand fell because of the falling wealth effect of lower house prices or if the Fed raised rates any higher.

The labour market participation rate is 66 % and there are higher rates of unemployment among blacks and Hispanics, some workers working part-time who would prefer to work full-time and some unemployed who have been unemployed for longer than 17 weeks. The rate of unemployment if discouraged workers and those involuntarily working part-time are taken into account is 8.2 %

If a shock arrived to push the economy into a tailspin unemployment would rise drastically. But for the moment there is no obvious trigger on the horizon unless a collapse in Asian stock markets sparks a run.