Sustained strength in wages continues to attract workers back into the American labor force, which resulted in a net increase of 428,000 jobs in April—the second such increase in a row—as the unemployment rate held steady at 3.6%.

Since the beginning of the year, the economy has added 2.1 million jobs, which is remarkable and underscores a hot labor market that will ease later in the year as tighter monetary and financial conditions cool demand.

Average hourly earnings rose by a robust 0.3% on the month and by 5.5% from a year ago, according to data released by the Bureau of Labor Statistics on Friday.

Perhaps more important, the three-month average hourly earnings figure slowed from a 5.2% increase in March to a 4.4% gain in April. That slowdown should on the margin ease concerns of investors over the direction and sustainability of the Federal Reserve’s policy normalization campaign, which shifted into a higher gear this week.

Policy implications

While improvement in the labor market and the steady increase in wages underscore the urgency at the Fed to continue its two-pronged approach of hiking the policy rate and drawing down the balance sheet simultaneously to address the inflation challenge, investors continue to question the sustainability of this policy framework. When added to rising oil prices and roiled supply chains in China, that policy has helped push equity values lower amid recent mind-bending volatility.

We expect that as the economy evolves, both growth and monthly hiring will slow to more familiar long-term trends of around 2% growth for the economy and increases of 200,000 in hiring. That, in turn, will most likely assuage some of the heightened concerns of investors around the durability and efficacy of the Fed’s policy direction.

But given a likely European Union embargo on Russian energy imports, global growth will slow at a quicker pace than in the United States. As the Federal Reserve accelerates its rate increases and balance sheet drawdown, that will result in a strong dollar and capital flows into American financial markets.

Global development in the near term may spur further volatility across asset classes, which will only add to those elevated concerns around the direction and sustainability of the Fed’s policy.

The data

Demand for labor in the service sector remains red hot with a net gain of 340,000 jobs, driven by gains of 104,000 in trade and transport, 78,000 in leisure and hospitality, and 59,000 in education and health. The financial sector added 35,000 jobs, and overall business service jobs increased by 41,000. Government jobs increased by 22,000 and the information sector added 12,000.

Manufacturing jobs grew by 55,000, while goods production jobs increased by 66,000. There was a net increase of 2,000 jobs in construction. The construction figure looks a bit weak, given what we are seeing around the economy, and that has plenty of room for upward revisions in the coming months.

The labor force participation rate fell slightly to 62.2% in April from 62.4% in March but is still up from 61.7% a year ago. The median duration of unemployment was seven-and-a-half weeks, and the employment-to-population ratio stands at 60.0%.

The size of the labor force declined by 363,000, which is statistically insignificant, and helped keep the unemployment rate at 3.6%. The number of people employed part time for economic reasons was hardly changed at 4.0 million in April and was down by 357,000 from February 2020.

The takeaway

Over the first four months of the year, there has been a net gain in total employment of 2.1 million jobs. The unemployment rate has declined from 4.0% to 3.6%, which we think will continue falling to 3% before reaching its bottom later in the year. Rising wages, it turns out, are an effective mechanism to attract labor back to the workforce.

In addition, the overall gain in the labor force participation rate from 61.7% one year ago to 62.2% in April—which is notably strong—reflects the hot labor market and gives the Fed room to pursue price stability as its primary policy goal.