No Slack: Top Job Markets Getting Tight

If quickly growing southern cities see their unemployment rates fall below 3 percent, wage inflation may not be far behind.

Despite some signs of slowing, job growth continues to be robust nationally, and there are increasing concerns that there might not be enough slack in the labor market in some metros.

Nationally, 304 of the top 388 metros have added nonfarm payroll jobs year-over-year through May, according to the Bureau of Labor Statistics’ Metropolitan Area Employment and Unemployment Survey. Growth continues to be concentrated in the southern and western portions of the country. Unemployment rates remained at remarkably low levels in many metros. unemployment rates are below 3 percent in 38 metros and below 4 percent in 141 metros.

Chart courtesy of the Bureau of Labor Statistics

Chart courtesy of the Bureau of Labor Statistics

 

As labor markets begin to fall below the 4-5 percent range that economists consider the “natural level” of unemployment, the unemployment rate becomes an important factor to contextualize the raw job numbers. The lower the unemployment rate, the less slack there is in the labor market, the more difficult it becomes to add jobs.

How Low is Too Low?

This phenomenon manifests itself most clearly in low-unemployment states such as Colorado. Boulder, Colo., has the lowest unemployment rate in the country at 2.0 percent and metros in the state are not far behind. Four of the top seven metros with the lowest unemployment rates in the country are within the Centennial State: Fort Collins (2.0, second), Denver (2.2 percent, fourth) and Greely (2.3 percent, seventh). Colorado Springs also sits well below the natural rate of unemployment at 2.7 percent.

When looking at only the total employment numbers, these metros would appear to have middling labor markets. Boulder has only added 1,400 nonfarm jobs this year, a 0.7 percent increase, and actually lost jobs from between the April and May survey. Denver, likewise has only 2.2 percent job growth from the same period last year.

Despite the state adding more than 90,000 residents in 2016 alone, the eighth most of any state by number and the seventh fastest on a percentage basis, many of Colorado’s metros are now looking at levels of unemployment that are extremely low by historical standards. While this may seem like an unmitigated positive development on the surface, it creates problems with job growth going forward. For one thing, the pool of skilled workers looking for work is low. Also, companies might have to compete for talent so aggressively that wages rise quickly enough to be inflationary.

However, much of the conversation around labor markets during the recovery has been concerned with discouraged workers leaving the labor force. If there is still slack in the labor markets that is “hidden” due to discouraged workers not currently being in the labor force, it will soon become apparent in places like Colorado. The situation in cities with unemployment below 3 percent bears monitoring. 

Southern U.S. Remains Strong

The southeastern part of the country, from North Carolina and Tennessee down through Florida continues to add jobs at a robust pace. Of the 100 largest metros in the country, 14 have seen their nonfarm employment increase more than 3 percent and nine of those are in the southeast.

Orlando continued its breakneck pace adding 49,000 jobs since the same period last year, a 4.1 percent increase. Partly due to vigorous population growth in Florida and partly because Orlando was much slower to rebound from the Great Recession, the unemployment rate in Orlando fell below for 4 percent for the first time during the recover in May.

Similarly, Nashville has more than 35,000 jobs since May of last year and saw its unemployment rate fall to 3.3 percent. If these fast growing southern cities see their unemployment rates fall below 3 percent like Colorado, wage inflation may not be far behind.