Challenging Labor Market Conditions For Small Businesses

The reported 517k surge in nonfarm payrolls in January has caused some market commentators to question the accuracy of this figure. The decline in the surveys’ response rate is among the factors being raised – alongside seasonal adjustments and new population estimates – as potentially reducing the reliability of the establishment data, as well as the results of the JOLTS survey.

In theory, a decline in the response rate could be a source of nonresponse bias, whereby the survey is no longer capturing a representative sample of US establishments. However, it is impossible to draw this conclusion without further information on the source of the lower response rates – i.e. if they are concentrated among certain sectors or industries.

Meanwhile, other sources corroborate the conclusion that the US labor market is extremely tight.

In particular, the NFIB survey reveals that the share of small business owners reporting job openings they could not fill increased by 4 points to 45% in January – significantly above the survey’s 49-year average of 23%. Moreover, the shares of respondents indicating that their top operating problem is labor quality and labor costs increased in January and are historically elevated at 24% and 10%, respectively. Notably, a net 46% of firms reported raising compensation to overcome tight labor supply conditions (a 2-point increase from December) and a net 22% plan to do so in the coming three months. And although at 19%, the net share of respondents planning to create new jobs in the next three months has rolled over from the August 2021 record of 32%, it is nevertheless elevated and ticked up by two points in January.

Ultimately, the risk is that persistently tight labor market conditions will continue to exert upside pressure on wages and keep inflation above the Fed’s 2% target, forcing policymakers to tighten monetary policy further (see The Numbers).