Every month, the U.S. Bureau of Labor Statistics releases estimates of the number of job openings, hires, fires, and other interesting labor market statistics.  The report is formally known as the Job Openings and Labor Turnover Survey (JOLTS, for short).

Among the reasons economists, investment bankers, and other financial professionals watch the JOLTS report is for signals on where wage growth might be heading.

The general presumption is that wage growth picks up when job openings per unemployed individual declines (i.e. when there are lots of job openings for every unemployed worker, it’s a signal that the labor market is tightening).

The Actual Connection Between Job Openings per Unemployed and Wage Growth

Here’s a look at the actual connection between job openings per unemployed worker and wage growth (year-over-year wage growth). On the horizontal axis is the job openings per unemployed worker, currently at a quite low 1.59. Over the past 15 years, the job openings per unemployed worker figure has floated between about 1.5 and 7, meaning that the current 1.59 is close to its all-time low.  And wage growth is only 2.6%! On the vertical axis is the year-over-year growth in wages, as approximated by the Employment Cost Index (commonly referred to as the ECI).

The relationship between the two is, as one would expect, downward sloping. The downward sloping correlation implies (no discussion here of causation) that when job openings per unemployed worker is low (i.e. when there are lots of jobs per unemployed individual), wage growth accelerates.  This makes sense.  When the labor market gets tighter, competition for workers happens through higher wages.

The opposite also holds.  During a recession when there’s lots of jobs per unemployed worker, wage growth generally weakens or slows.

Now, take a look at the data points that are, relatively speaking, far away from the regression line.

What years are they?  2012 to 2015 (bottom left corner).  The relationship between job openings per unemployed worker and wage growth has broken down over the past few years.

Job Openings and Wage Growth

Assigning a Value to the Wage Growth/Job Openings Picture

With the weakening of the relationship between job openings and wage growth as the background, two questions come to mind. First, what should wage growth be?  And second, how much money does it represent?

Addressing the wage growth rate question first, what would wage growth be if the historical relationship between job openings and wage growth held? The regression line at a job openings per unemployed value of 1.59 (what it is today) predicts an annual wage growth of 3.4%. What is it today?  2.6%.

So, if the relationship were to have held, there’s 0.8% in wage growth missing from the American laborer.

How Much Is 2.6%?

Switching to the second question, how much does the 2.6% versus 3.4% wage growth differential equate to? Essentially, if wages grew at 3.4% instead of 2.6%, workers would have another $63 billion in their pockets.

It’s a chunk of change in an American economy that’s struggling to grow by 3% or so.


Overall, although not too surprising to individuals watching the details of the macroeconomic environment, the connection between job openings and wage growth has deteriorated in recent years.

If the historical relationship between job openings and wage growth were to have held in 2015, then American workers would have about another $63 billion in their pockets.

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There’s no profession more intricately connected with the state of American labor than the investment banking world. Billions hang in the balance on judgements about the state of the American and the global labor markets. Most in the investment banking community think the labor market has lots of room to grow before any discussion of employment peaking is warranted.

Are they right?

Here are a couple of graphs that may make you double think the state of American labor (with some counterarguments as well).

A Look at the Labor Picture Right Now

Here’s a look at the American labor market as it stands today. Overall, the past year has been quite good to workers in the U.S.

Since seeing employment growth “bottom” in March 2014, month-over-month employment growth has been above 200K every month except two. The strong performance begs the question – is the labor market peaking?

Here are two arguments that suggest such a question is warranted.


Year-over-Year Employment Growth

The first graph looks at year-over-year growth in employment. The labels on the high growth points are the employment growth rates during the respective business cycle peak.

In 1973, employment growth peaked at 4.63%.  In 1978, 5.43%. In 1981, 1.96%.  In 1984, 5.44%.  In 1988, 3.28%. In 1995, 3.47%.  In 2000, 2.55%.  In 2006, 2.16%.

The 2.34% for 2015 is February 2015.  This is the strongest growth rate we’ve seen so far during the current expansion. Interestingly, since February 2015, employment growth has declined to 2.11%. It is this deceleration that suggests the labor market might be peaking (or perhaps already has peaked).

The deceleration from peak occurs in every business cycle.


The Part-Time/Full-Time Picture

The second area signaling perhaps that the labor market is peaking is the part-time/full-time employment view. The top graphic in the following figure is the month-over-month growth in employment (absolute net new jobs). The middle graphic is the month-over-month growth in full-time employment.  In June 2015, it came in at a healthy +370K. The bottom graphic is the month-over-month growth in part-time employment.  In 2015, it came in a -147K.

What does this picture have to do with the labor market?

The answer is that when there’s a trend in shifting from part-time to full-time employment, it’s generally a signal that the labor market might be peaking. As corroborating evidence, take a look at the 2000 to 2003 experience and the 2006 to 2009 experience.


As indicated by the black boxes, prior to the prior two recessions, part-time employment dropped before the employment picture peaked, fairly similar to what we’re seeing today.



Counterargument: Why Might the Labor Market NOT Be Peaking?

There are, of course, lots of good reasons to argue that the American labor has a long way to go before peaking.

Factors that are nowhere near peaking include wage growth (Average Hourly Earnings are stuck around 2%, well below the overheating 3.5% experienced in 2006), lack of inflation, depressed labor force participation, and an unemployment rate still above peaking level.


Overall, job growth in the U.S. continues to be quite strong. The strength, of course, raises the question on how long it can continue to go on.

Some point to various indicators that suggest jobs could continue to grow another five or six years. These points are certainly valid, as are the counterpoints addressed here.

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Unless you’ve been away from the financial industry for some time, you’re likely aware that the Federal Reserve continues to give indications that it will hike the federal funds target rate fairly soon. If you believe recent statements from Fed Chairwoman Janet Yellen, the Fed may even raise rates later this year.

A pending Fed rate hike poses the question: what will a Fed rate hike mean for investment banking employment?

Looking at the Empirical Connection

One way to speculate on how a Fed rate hike might affect investment banking employment is to look at what the historical connection between the two has been. The following graphic is just such a look.

On the vertical axis is the percentage change in investment banking employment for each of the past 4 Federal Reserve tightening cycles (starting in 1990). On the horizontal axis is the number of days the tightening cycle lasted.  Interestingly, rate movements by the Fed have become more stable over the past couple of decades, with “high” rate hikes having virtually disappeared.

Each colored line represents the respective Federal Reserve rate hike cycle. The label for each line is the month and year in which the Fed started raising rates

.Investment Banking Job Growth During Federal Reserve Tightening Cycles (Past 4)

Discussion of the Empirics

Interestingly, employment in the investment banking industry may not be as sensitive to Federal Reserve rate changes as some might think. The gray-scaled vertical and horizontal bars are the inter-quartile range for either the growth in jobs or the length of time the rate hiking cycle lasted.

The median investment banking job growth during a rate hiking cycle is 3.3%, with a range from 1.1% and 5.3%. The median length of time for a Fed rate hiking cycle is 229 days, ranging from a low of 89 to a high of 432.

What does the investment banking job growth picture during Fed rate hiking cycles mean?

Essentially, although there’s reasonable concern that a Fed rate hike may hurt to U.S. economy, past experience would indicate that investment banks continue to hire during rate hiking cycles. Every investment banker is well aware that the Fed may, for the first time in eight years, actually raise the federal funds target rate.

Federal Funds Target Rate

Such a raise may put downward pressure on investment banking business, although, in looking at the connection between Fed rate hiking cycles and employment in the investment banking industry, a Fed rate hike probably won’t hurt hiring in the industry.

That is, if past experience is any indication of what might happen this time around.

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