Oil and Labor: Wage Increases on the Way?

A supply-constrained view of oil and the economy argues that GDP growth should accelerate when the oil supply increases and the price of oil falls.  Given that the price of oil has fallen, we would look for signs of growth, including in labor markets.

US labor market conditions are monitored in a monthly survey published by the Bureau of Labor Statistics.  The resulting report, known as JOLTS, includes data on job openings, hires and terminations.

JOLTS (Nov. 2014).png

US Private and Government Job Openings, Hires, Quits and Layoffs / Discharges

Source: BLS JOLTS Survey, after McBride on Calculated Risk

JOLTS has only been in existence since late 2000, and thus covers only one full business cycle.   As a result, the survey provides only limited insight into historical trends.

Having said that, recent JOLTS data is, well, jolting.  Job openings are currently higher than at the peak of the last expansion and have soared by more than a million in the last year alone.  Indeed, job openings are running well ahead of hires, which is historically unprecedented in the data.  Meanwhile, quits jumped by 11% in a single month to September 2014 (the last month of the current survey).   Quits matter, because employees typically quit when they have the prospect of a better job, and a 'better job' is often defined as 'a position that pays more'.

If we combine this with job creation for 2014 at levels not seen since 1999, and initial unemployment claims the lowest since 2000 (and heading towards four decade lows), we are left with the impression of a labor market with extraordinary momentum.   Employers are hanging on to their employees because they have demand for their services, and as importantly, because they are unable to hire comparable quality replacements at the same wage.   It is the same message that 'quits' is telling us.  Market power is shifting to labor, and doing so rapidly.

Thus, labor market developments are consistent with supply-constrained oil markets analysis.  There is no secular stagnation, just the ebbing of a long oil shock.  Lower oil prices mean an end to stagnation and a rejuvenated economy.  We are re-living 1985, the recovery from the previous major oil shock.

This has wider implications.  First, GDP growth will be greater than expected, both in the US and Europe.  Second, although employment growth has not yet translated into wage growth, the dynamism in hires, jobs and initial unemployment claims suggest that wage pressures could appear within a few quarters (mid-year 2015 would seem plausible).  This in turn begs the question of whether inflation more broadly might pick up, and interest rates rise.  If so, the dollar could continue to see material strengthening, putting downward pressure on oil prices, all other things equal. 

For the oil business, the implications are a bit different.  First, there will be no wage inflation in the oil sector.  It is recessionary conditions in the oil sector (ie, over-supply) which are permitting GDP growth in the broader economy.   In the last seven years, oil consumers suffered as the oil sector prospered.  Now the shoe is on the other foot.

On the other hand, low oil prices look unsustainable in the longer term.  If a supply-constrained approach is correct, there are substantial hidden reserves of oil demand, and these will appear over the next year or so. 

In the oil business, it is time to be opportunistic, to make a few acquisitions and tie some favorable contracts while oil prices are low.