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Understanding The US Labour Market Report

Michael Brown
Senior Research Strategist
7 feb 2024
An article exploring all you need to know about the monthly US labour market report, including the headline nonfarm payrolls print.

The US labour market report, despite often being referred to as ‘Nonfarm Payrolls’ or, simply, ‘NFP', is actually a much more comprehensive report, containing three distinct sections:

  • Change in Nonfarm Employment - establishment survey
  • Unemployment & measures of labour market slack - household survey
  • Average hourly earnings - establishment survey

Most other developed economies tend to follow a similar format for their own employment releases, with some regional differences (e.g., the UK typically measures the number of new jobless benefit claimants rather than the change in overall employment). In this section, we will focus primarily on the US jobs report, taking each of the aforementioned sections in turn.

Before doing so, however, it is important to acknowledge that the data which comprises the above releases comes from two surveys conducted by the Bureau of Labor Statistics (BLS); the household survey, and the establishment survey - the name of each pertains to the group of respondents for each survey. Both surveys are conducted in the week which contains the 12th of the month, with the labour market report then released at 8:30am ET on the third Friday following the conclusion of this reference week. This often, but not always, falls on the first Friday of the month.

The Employment Situation report, to use its official name, is by far the most important US, and global, economic indicator released every month. While its impact has waned over time, there is no other indicator to which FX, equities, and bonds typically display such a significant and violent reaction. Many traders can make, or lose, their month during the session that the report is released. In the institutional world, it has been known for people to be fired for missing the release of the jobs report. On a lighter note, the monthly NFP release gives the opportunity for trading floors the world over to engage in the traditional sweepstake, where bragging rights, and a significant kitty, go to the person who guesses the payrolls print closest to the actual release.

Change in Nonfarm Employment

The headline measure of the labour market report is the Change in Nonfarm Employment, often shortened simply to NFP. This gauge measures the absolute month-on-month change in employment, thereby representing the number of jobs added to, or lost from, the economy over the past month.

Importantly, NFP excludes agricultural workers, employees of non-profit organisations, and serving military personnel, meaning that the data typically accounts for around 80% of the entire US workforce at a given time. To collate the data, the BLS use the aforementioned establishment survey, surveying around 130k businesses on a monthly basis.

Furthermore, the NFP metric is a seasonally adjusted data point. The BLS use seasonal adjustment in an attempt to ‘smooth’ the data, reducing the noise associated with, for example, the surge in seasonal hiring around the Christmas period, or the typical layoffs in the education sector seen at the end of the school year. Nevertheless, these seasonal adjustments are far from perfect, hence said ‘one-off’ factors can, and often do, skew the overall figure.

While the headline NFP figure, and how it compares both to the consensus expectation and the prior print, is the primary driver of market volatility on ‘Jobs Day’, the BLS do release much more information than this figure alone. A full breakdown of employment change by sector is helpfully provided, allowing economists to gauge whether a surge in hiring is a result of a boon in a particular industry, while also allowing a read into sentiment by comparing government and private hiring (the former being relatively faster than the latter typically implies a lack of confidence in the economic environment).

Unemployment & Slack

Besides the headline NFP print, the employment report provides a range of other important information to gauge conditions in the labour market. Chief among these other data points are the various measures of labour market slack, all of which stem from the BLS' household survey, which contains responses from around 60,000 households across the US. All are seasonally adjusted metrics:

  • Unemployment Rate (U-3): The headline measure of labour market slack, calculated simply by dividing the number of unemployed workers, by the total size of the civilian labour force. Typically, a U-3 rate below 5% is representative of an economy at ‘full employment’, thought the post-GFC experience has showed that the true estimate of full employment is likely lower than this figure. Note that to be accounted for under the unemployment rate, someone must be actively looking for work.
  • Underemployment Rate (U-6): The U-6 rate is a more comprehensive gauge of unemployment than its U-3 counterpart, measuring a much wider range of jobless people. Hence, the underemployment rate represents all those included in the U-3 gauge, as well as those who have been seeking employment but temporarily halted their search, in addition to people who have returned to education or have become disabled. The U-6 figure also includes those who are working part-time but would desire a full-time role, hence representing a much more accurate gauge of slack within the labour market.
  • Participation Rate: This measures the number of people within the labour force (either employed, or seeking employment) as a percentage of the working-age population, thereby providing an approximation as to participation in the jobs market among the broader population. The participation rate is also broken down by age, gender, and ethnicity, as diversity - and ensuring job gains are broadly spread across as wide a swathe of the economy as possible - has become an increasing focus of both monetary and fiscal policymakers.

These three indicators should be taken together to build up a broad picture of tightness within the labour market. It is also key to recognise how they can influence each other; for instance, a rise in participation (i.e. more people entering the labour force) can cause a drop in the unemployment rate, even if the headline nonfarm payrolls figure is relatively uninspiring.

Average Earnings

This part of the employment report comes from the establishment survey, and is often considered as a proxy for inflation, given the typically tight correlation between earnings and price pressures; hence, this part of the report is a particular focus for fixed income traders when the jobs report is released.

Put simply, the ‘AHE’ prints measure how average hourly earnings have changed over the course of the month, as reported by businesses, and are gauged on both an MoM % and YoY % basis. While technically measuring earnings, the AHE print is typically used as a proxy for wages and labour costs more broadly, given the release’s more timely nature than other employment cost indices.

This part of the establishment survey also includes data pertaining to the average number of weekly hours worked per employee, which is a useful proxy for gauging labour demand, and broader economic conditions, with a reduction in hours typically preceding layoffs at the beginning of an economic downturn.

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