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Fed actions to slow employment are ‘taking hold,’ EPI president says

Economic Policy Institute President Heidi Shierholz joins Yahoo Finance Live to explain the differences in the July jobs report headline numbers and the household survey and what that means for the labor market.

Video Transcript

BRIAN CHEUNG: But let's dive a little bit deeper into what we got at least this morning with Economic Policy Institute president, Heidi Shierholz, who joins us now live. Heidi, great to have you on the program. You know I was watching your Twitter thread this morning.

You had some pretty interesting points that despite the headline number that we saw, though, there is a divergence between the household and the establishment, the way that they are reporting to the Bureau of Labor statistics. I know it's a little bit wonky. Walk us through exactly what you're talking about there and why maybe it's not as easy as, OK, it's just one number, and it was very positive.

HEIDI SHIERHOLZ: Yeah, that is a really important question when you're looking at this report. So when-- the first Friday when the jobs numbers come out, there's two surveys, one survey that the headline jobs numbers, payroll numbers, we added 528,000 jobs, that comes from an establishment survey, where BLS asked businesses how many people you have on payroll. And the unemployment rate comes from a household survey, where they ask people, are you employed? If you're not employed, are you looking for work? All that stuff.

The household survey is a lot smaller than the establishment survey. So but we get an employment count in both of them. But because the household survey is smaller, more volatile, the rule of thumb is that you always want to look at the employment numbers in the establishment survey. That's what you usually do, except potentially in times like we're in right now.

When you're in inflection points, when they are going from a fast growth to slower growth or vice versa, at those times, often, the establishment survey is a little bit less reliable than usual. So I sort of wait up my-- the information that you're getting from the household survey.

And that's a long way to say the household survey right now is-- the employment count was signaling a little bit of problem, a little bit of problems. We have, in the household survey, employment basically has not grown at all in recent months. So that could be a kind of bellwether for where we're headed. I do think we got this gangbusters numbers, but we can expect a slowdown.

AKIKO FUJITA: So, Heidi, if you take that argument and what we were talking about, which is we want to see a bit of a slowdown in the labor market, if you are the Fed, what does that household survey tell you about the kind of impact we are seeing from Fed policy right now?

HEIDI SHIERHOLZ: The household survey, those employment numbers in the household survey are saying that the Fed's actions to slow down the labor market, to slow down employment growth, are-- is taking hold, that we're starting to see that. It's-- the data is evolving really fast right now, so it will be interesting to see how this unfolds. But you are seeing signs of that. So the headline numbers, unbelievably strong. When you dig down in, you're starting to see the sort of tendrils of the actions the Fed has taken.

BRIAN CHEUNG: So I guess, what should we expect for August? Because if we are kind of hitting that inflection point here, then, maybe are we going to start to see that slow? Because I imagine policymakers would want to see that bleeding through to the headline as well because overall, the picture of the labor market still remains strong. And even though we don't want to see unemployment go up to 6%, the expectation, though, is that it's supposed to be cooling, even on a headline basis. And that hasn't happened yet.

HEIDI SHIERHOLZ: Right, I think we-- if the labor market really is cooling, it will definitely start to show up in the headline numbers. And I-- because of the aggressive action the Fed has taken, I absolutely expect that to happen going forward. One of the measures that I'm looking at really closely is what's going on with wage growth because when it comes down to it, that's what the Fed really needs to care about when they decide what actions they're going to take.

Wage growth actually ticked up in July, but if you look at the longer run trend, you're seeing a really pretty clear deceleration. And that's the thing that can indicate to the Fed, look-- that the fact that wages are coming down means we don't have to continue to move as aggressively. I think that's the kind of thing we're going to see going forward. And I hope that's what the Federal Reserve policymakers conclude from that.

AKIKO FUJITA: Heidi, we haven't seen unemployment tick up, but we have heard plenty of commentary coming from companies, especially on these earnings calls, talking about slowing hiring not necessarily leading to job cuts yet. And I wonder if you think that it's more of a cautious approach on the part of companies. I mean, what does that tell you about what's to come if companies are sort of signaling that without saying, we're cutting things right away?

HEIDI SHIERHOLZ: It's a very interesting question. We are-- the disconnect that we're seeing is actually going in the other way, that we saw GDP growth actually contracted in the second quarter and measures that I really like to look at. But employment growth was very strong, which may indicate the other direction that employers are really hoarding labor.

I mean, one of the things I think about is employers just went through this really intense thing with COVID where a lot of employers saw the COVID recession have been laid off a ton of workers, and then five minutes later, wanted them back. And so that could be having some effect on how businesses are reacting to this. Like, I'm not going to move immediately.

Maybe there could be some return to this idea of labor hoarding during recessions, which used to be a really identifiable phenomenon that businesses would keep workers. Even if they knew that demand for their goods and services would go down, they would keep workers on because they valued the match. They'd invested in those workers. They didn't want to just let them go and then have to do the expensive retraining, rehiring on the other end when things got better.

In recent recessions, that phenomenon of labor hoarding has not been happening. And I do wonder-- we don't know for sure. We'll see how things unroll. But I do wonder if we're seeing some of that coming back right now.

AKIKO FUJITA: Yeah, it's another point to watch here. Heidi, it's good to talk to you today. Economic Policy Institute president Heidi Shierholz joining us.