Tight Jobs Market Equals Higher Pay, Lower Profits -- Heard on the Street

The job market has gone from tightening to tight. It is a difference that matters to investors.

The Labor Department on Friday reported the U.S. added 211,000 jobs in April, and that the unemployment rate dropped to a 10-year low of 4.4%. Average hourly earnings rose 0.3% from March, but were still only up 2.5% from a year earlier. There are some important takeaways from those numbers.

First, even though the economy has been growing slowly and consumers are spending cautiously, employers are still in hiring mode. That suggests companies are struggling to wring any extra productivity out of their businesses, and must hire to meet even slight increases in demand. And as the economy needs to add fewer than 100,000 jobs to keep up with population growth, the current pace of hiring will only make the job market tighter.

Second, the job market is tight. That is reflected not just in the unemployment rate, but also the Labor Department's broader measures of unemployment, which are all near decade lows. At a simpler level, the argument that the economy has hordes of potential workers who have given up on the job hunt, and are therefore uncounted in the labor statistics, may have had merit when the unemployment rate was 6%, but is harder argue now. If a 4.4% unemployment rate isn't enough to pull the people back into the labor force, what is?

Third, companies so far have gotten away with raising wages only slowly, but that will change very soon. A 4.4% unemployment rate is reflective of a job market where many workers can demand better pay, or take their work elsewhere. That prospect is more than enough to keep the Federal Reserve in tightening mode, and makes the case for a June rate increase even stronger.

For businesses, it is time to think differently about growth and labor costs. Profit growth for big companies in the first quarter was strong despite the sluggish economy because executives kept a tight lid on spending, including on workers. Unless higher labor costs are offset by stronger growth, it could mean that the first quarter marked peak profitability.

Investors have been winners in the long-running battle between capital and labor. That could be changing.

Write to Justin Lahart at justin.lahart@wsj.com

(END) Dow Jones Newswires

May 05, 2017 11:54 ET (15:54 GMT)