Too Hot to Handle: America Created 517,000 Jobs in January and Unemployment Fell to 3.4%

Jerome Powell, Chairman of the Federal Reserve Board, testifies during a House Financial S
SAUL LOEB/AFP via Getty Images

The U.S. economy added 517,000 jobs in January and the unemployment rate fell to 3.4 percent, the Labor Department said Friday.

Economists had expected the economy to add 187,000 jobs and the unemployment rate to tick up to 3.6 percent. The range of forecasts by economists surveyed by Econoday was between a gain on payrolls of 150,000 to 260,000, a rather large range that suggests a higher level of uncertainty. On unemployment, the range of forecasts was 3.4 percent to 3.6 percent.

The Labor Department’s Job Opening and Labor Turnover Survey, knowns as Jolts, showed that there were 11 million job openings at the end of December, around 1.9 vacancies for every unemployed person. Federal Reserve officials frequently cite the vacancy ratio as evidence that the labor market is so tight that it risks fueling inflation.

In November, the preliminary report indicated the economy created 223,000 jobs, exceeding expectations for around 200,000. The unemployment rate was reported as declining to 3.5 percent, defying expectations that it would tick up.

The revisions to the prior numbers indicate the labor market was even hotter than thought. The growth in payrolls in November was revised up from 256,000 to 290,000 and the December figure was revised up from 223,000 to 260,000. So employment was already 71,000 higher than previously thought.

Fed officials have said that softening demand for labor is the key to bringing inflation down to their two percent target. They fear that high demand for labor is fueling wage increases that, in turn, drive prices of goods and services up.  The Labor Department’s Employment Cost Index showed compensation costs increased by one percent in the final quarter of the year, substantially less than expected.

The softness of recent wage data has created a bit of a mystery: why are wages not moving up more given the extraordinary tightness of the labor market? Some say the softness of wage gains may be a sign of underlying disinflationary forces taking hold in the economy. Others say that wage gains may still be in the pipeline, delayed by seasonality and still lingering pandemic-related distortions.

Even with the huge gains in payrolls in January, the rise in average hourly earnings for all employees in January was muted. Average wages rose by 10 cents, or 0.3 percent, to $33.03.  Average hourly earnings of private-sector production and nonsupervisory employees rose by 7 cents, or 0.2 percent, to $28.26.


Please let us know if you're having issues with commenting.