The US economy is rolling into the new year with unemployment fast approaching the near-record lows seen just before the pandemic — and employers struggling to find workers.
The jobless rate fell to 3.9 percent in December from 4.2 percent a month earlier, the US Labor Department said on Friday. It was the seventh straight monthly decline, and put the rate only 0.4 percentage point above its pre-pandemic mark in February 2020.
The final employment report of 2021 reinforced the dynamic that was in play for much of last year: a tight labor market with far more open jobs than there are willing workers to fill them. There are 2.2 million fewer people in the labor force than before COVID.
Underscoring the mismatch: US employers added 199,000 jobs last month, a decline from November and the second straight month in which hiring fell far short of forecasts.
For all of 2021, the economy added a record number of new jobs — more than 6.4 million. Wages rose substantially and hours worked increased. The labor force began to expand.
“Looking over the full year, 2021 jobs data is pretty mindboggling,” Heidi Shierholz, president of the Economic Policy Institute, wrote on Twitter.
How strong is the job market?
There were 10.6 million job openings at the end of November, just shy of the record set a month earlier, the Labor Department reported earlier this week. That’s pushing wages higher. The average hourly wage rose 4.7 percent compared with a year prior.
The data used in Friday’s report were collected before the COVID surge driven by the Omicron variant hit in the latter part of December. Economists expect Omicron to take a bite out of economic growth in the early months of the new year, especially if Americans react to the spike in infections by hunkering down.
Still, they predict the expansion will continue in 2022, though at a slower pace than last year. Hiring should pick up once the Omicron wave recedes, which epidemiologists say is likely over the next month. The economy could reach full employment — an inexact term that describes when everyone who wants a job has one — sometime later this year.
With labor scarce and consumer price inflation running at a four-decade high, the Federal Reserve has indicated that it will start raising interest rates this year to prevent the economy from overheating. That could happen as early as March, though Brian Bethune, an economics professor at Boston College, said the central bank will proceed cautiously.
“We hold the view that the Fed will not be stampeded into raising rates prematurely in the first quarter of 2022,” he wrote in an e-mail. “Yearly inflation will fall off sharply at the end of 2022.”
Of course, taming inflation is a tricky job. If the Fed moves too quickly, it could inadvertently tip the economy into a recession. If it moves too slowly, soaring prices could wreak havoc. A misfire in either direction could tank asset prices — from stocks to bitcoin, from houses to skyscrapers — that have soared despite the pandemic.
The monthly jobs data are derived from two Labor Department surveys: one of employers, which tracks hiring, and one of households, which monitors employment status. There is sometimes a disconnect between the two, as there was in November and December.
For example: The number of people working rose by 651,000 last month, according to the household survey, after swelling by more than 1.1 million in November. But the employer survey showed tepid payroll growth in both months.
The pandemic has reduced the response rate to the surveys, resulting in significant revisions to previous months’ results, according to Mark Zandi, chief economist at Moody’s Analytics. Job growth was revised upward for October and November, and Zandi expects December’s payroll number to be revised as well.
For now, total employment remains 3.6 million jobs, or 2.3 percent, below February 2020 levels. The gap is higher when accounting for population growth.
The labor force participation rate — the percentage of the adult population working or looking for a job — was unchanged in December at 61.9 percent. That is 1.5 percentage points below pre-pandemic levels. Looked at another way, if we had the same participation rate as in February 2020, there would be another 3.6 million people in the labor pool.
This statistic underscores why employers are finding it so hard to hire. Economists say that the growth in the ranks of available workers has been held by back by two factors.
The pandemic has left many people reluctant to work, especially in customer-facing jobs, while others can’t find child care or help with sick family members. Compounding the problem: an increase in retirements as baby boomers call it quits.
Payroll gains in December were led by leisure and hospitality, which added 53,000 jobs. Employment in the sector remains 7.2 percent below the February 2020 mark despite a year-over-year increase in average hourly wages of 14 percent.
Professional and business services added 43,000 jobs, while manufacturing employment was up by 26,000.
Even as the average jobless rate fell below 4 percent for the first time since early in 2020, people of color continued to be plagued by higher unemployment.
The jobless rate for Black people was little changed at 7.1 percent, compared with 3.2 percent for whites. The rate was 3.8 percent for Asians and 4.9 percent for Hispanics, also little changed from November.
Yes, the jobs recovery is incomplete. And unless COVID is marginalized, we may take a few steps back before we move forward.