BREAKINGVIEWS-Rickety bottom rung of US labor market is ominous

By Gabriel Rubin

WASHINGTON, July 29 (Reuters Breakingviews) - The U.S. labor market has persevered through an inflation spike, high interest rates, and the beginning of a trade war, but workers on the bottom rung are starting to lose their grip. This year, wage growth for the bottom quartile of earners has cooled far faster than for other groups, rising at just 3.7% annually through June compared to 4.3% for all workers. Those jobs are concentrated in retail, leisure and hospitality, making them especially vulnerable to slowdowns in consumer spending. Layoffs are still at low levels for now, but the chill in pay and new openings suggests spreading weakness.

This fragility reverses post-pandemic trends, when a labor supply crunch gave low-wage workers leverage and their earnings rose more quickly than others' throughout 2021 and 2022. Now, the market appears stuck. Recent employment growth is highly concentrated in a single industry, healthcare, which accounted for 44% of new jobs in May. While layoff rates are near pandemic lows at just 1%, the number of people quitting has declined sharply. This trend suggests employees don’t have confidence that they could find a better job than the one they have, depressing overall wage growth. The average workweek is now just over 34.2 hours, the lowest since 2011, a reflection of non-salaried workers being kept on but getting fewer shifts.

The fact that the unemployment rate remains below 4.5% and a healthy share of prime working-age Americans continue to hold jobs means the bottom won’t fall out of the labor market overnight. Those employed, even without pay hikes and fewer shifts, continue to power the roughly 70% of the U.S. economy constituted by consumer spending. Trade war and interest rate uncertainty may be crimping growth, but they also haven’t induced contraction. Employers who struggled to hire during the aftermath of the pandemic may be reluctant to shed workers, only to train new ones if the outlook improves.

This “stall speed” for employment is keeping Goldman Sachs’ 12-month recession risk estimate at 30%, according to the bank’s chief economist. But economic expansions don’t die of old age, as the adage goes: they’re murdered. Uncertainty generated by wild swings in tariff levels from 2% to over 20% in a matter of months is one potential culprit. The specter of inflation is also likely to keep the Federal Reserve from cutting rates at its meeting this week, even if worries about the labor market have convinced some officials, including governors Christopher Waller and Michelle Bowman, that policy is too restrictive. Those cuts will come eventually. But it would be better to do so for positive reasons, like disinflation in consumer prices, rather than a collapsing job market.

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CONTEXT NEWS

New U.S. applications for jobless benefits fell to a three-month low the week ending July 19, pointing to stable labor market conditions, though sluggish hiring is making it harder for many laid-off workers to land new opportunities. Fewer workers are switching jobs than they did between 2021 and 2023.

While employers have been mostly reluctant to lay off workers, they have scaled back on hiring and shifts while awaiting more clarity on President Donald Trump's protectionist trade policy.