This business cycle celebrates its five-year anniversary. For much of the past five years, the labor market has been more cause for worry than celebration. Although things seem to be looking up, there are some worrisome issues to look out for. In particular, the Federal Reserve seems poised to keep on raising interest rates, thus potentially slowing the economy and the labor market, and the economy needs to find a replacement for the construction boom as the primary driver of employment growth.

Figures released today by the Bureau of Labor Statistics showed that 211,000 new jobs were created in March, down slightly from 225,000 in February. These are respectable increases, although they are barely average. So far, there have been only six months in the 60 months of this business cycle that had above average employment growth. Neither February nor March was among them. Similarly, average monthly employment growth over the past five years was 0.03 percent, or one-sixth of the long-term average. Even for the past 31 months, when jobs actually increased after a prolonged decline, monthly job growth only averaged 0.1 percent per month, or 30 percent slower than the historical average job growth rate from 1946 to March 2001.

The jobs data shine the light on two important issues. First, there is no sign of inflationary pressure emanating from the labor market. The Federal Reserve indicated in its last statement on March 28 that it saw mechanisms at work that could lead to accelerating price increases. Yet, the continued below-average job growth has actually translated into a slowing of wage growth. Before inflation, wages grew at 0.2 percent in March, the lowest rate since last November. Also, year-over-year price increases peaked last September, while year-over-year wage increases did not peak until February. Importantly, though, for most of this business cycle wage growth fell below price growth. Inflation-adjusted hourly wages in February 2005, the last month for which data are available, were the same, and weekly wages were lower as in November 2001, when the recovery started. February’s inflation-adjusted wages were also lower than those of last summer before price increases started. Further, with annual price increases still exceeding three percent, it is likely that price growth will again exceed wage growth for March and inflation adjusted wages will continue to be flat or declining.

Second, a slowing in the construction boom seems to be working its way through the labor market data. For the entire business cycle, construction related employment — construction, mortgage financing, building material retail, and so on — contributed 46.8 percent of all new jobs and 84.1 percent of all new private sector jobs. In the past six months, construction related job growth even accelerated. From March 2001 to September 2005, construction-related employment grew on average by 0.1 percent per month. Since then, it has grown by 0.4 percent. Yet, in March, construction related employment grew only 0.1 percent, the lowest monthly growth rate since January 2005.

What is taking the place of construction related jobs? Retail employment in general merchandise, such as department stores, administrative services, restaurants, and health care, each added between 26,000 and 33,000 new jobs in March.

It is unclear, though, if there is enough momentum in non-construction-related jobs to dampen the impact of the slowing construction boom. For one, the expanding industries pay less than the construction related industries. Hourly earnings in retail were $12.51, and in leisure and hospitality they were $9.42 in March. In comparison, the two largest sectors of construction-related jobs — construction and real estate financial services — were located in sectors that paid $19.52 and $18.41, respectively. Moreover, at least two of the sectors — general merchandise retail and restaurants — directly depend on consumer spending. With a housing boom slowing down, the refinancing boom is coming to an end. At the same time, wage growth is still weak. Consumption hence may slow down once families have spent all of the money that was set free by the surge in home equity cash-outs in the second half of 2005.

As families are still waiting for wages to rise faster than inflation, two threats to the labor market appear on the horizon. Higher interest rates and the end of the construction boom may slow consumption, economic, and job growth.

Christian Weller is a Senior Economist at the Center for American Progress, where he specializes in Social Security and retirement income, macroeconomics, the Federal Reserve, and international finance.

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Christian E. Weller

Senior Fellow