Big Drop in Unemployment Rate as Labor Market Continues to Recover from Viral Recession

• May jobs report was solid but not spectacular, with job growth of 559,000.
• Over the past three months job growth has averaged 540,000. At this pace employment would return to its pre-recession level in mid-2023.
• The unemployment rate fell to 5.8% in May from 6.1% in April. But some of the drop in the unemployment rate came from a smaller workforce.
• The labor market will continue to improve this year and next thanks to vaccines and stimulus.

The May jobs report was good but not great. The U.S. economy added 559,000 jobs over the month according to a survey of employers, somewhat below the consensus estimate of 670,000. But after April’s disappointing report, the improvement in May is proof that the labor market is recovering solidly from the Viral Recession. April job growth was 278,000, revised up slightly from 266,000. March job growth was revised somewhat higher to 785,000, from 770,000.

The private sector added 492,000 jobs in May, almost all in service industries. Employment in leisure/hospitality services rose by 292,000 in May, the fourth straight month with gains of at least 225,000, as stimulus checks, vaccinations, and falling coronavirus cases spur a strong rebound in dining out, travel, and tourism. There was a decline in construction employment in May, perhaps because of shortages of building materials; difficulty in finding construction workers have also been a drag. But manufacturing employment rose solidly over the month (+23,000), despite reports of input shortages.

The three-month moving average of job growth through May was around 540,000. With employment in May still down by about 7.6 million (5%) from its pre-pandemic peak, at this pace it would take a little more than a year for employment to return to where it was in early 2020. Given that the employment fell by 22 million, or 15%, in March and April of last year, the rebound in the job market has been unprecedented.

The unemployment rate fell to 5.8% in May from 6.1% in April and 6.0% in March. Some of the decline in the unemployment rate in May came from more jobs in the economy. According to a survey of individuals, different from the survey of employers, employment rose by 444,000 in May. But some of the drop in the unemployment rate over the month was because the labor force contracted by 53,000, with the share of adults working or looking for work (the labor force participation rate) falling to 61.6%, from 61.7%. With many employers reporting difficulty in finding workers, this drop in the labor force participation rate is worrisome, although it may just be monthly noise in the data.

Average hourly earnings rose a solid 0.5% in May, following a 0.7% increase in April. The big gains over the past couple of months are despite many of the new jobs coming in the lower-wage leisure/hospitality services industry, suggesting that competition for workers is leading firms to raise pay. The average workweek held steady in May at 34.9 hours.

The labor market continued to improve in May, and job growth bounced back after a disappointing April. The drop in the unemployment rate was another positive. But the report was not quite as strong as some other indicators (unemployment insurance claims, hiring surveys) had suggested. Vaccinations and stimulus payments sent out earlier this year are boosting consumer spending, driving the recovery.

But shortages of some inputs are preventing stronger job growth. Another factor that may be holding back employment is a shortage of available workers. There are various reasons for this: concern over catching the coronavirus, childcare problems with schools closed, and extra unemployment insurance payments that may be making some potential workers pickier about taking a new job. Solid wage growth over the past couple of months suggests that businesses are raising pay to bring in more workers.

The labor market will continue to improve throughout the rest of 2021 and into 2022, with average monthly job growth of around 600,000. At this pace employment will return to its pre-pandemic level in mid-2023. The unemployment rate will continue to decline with solid job growth, ending this year at around 5%, and next year slightly above 4%. But given that there are millions of people who dropped out of the workforce with the pandemic, the more pressing question is how many of them will eventually return.

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