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By Robert Johnson, CFA and Jeremy Glaser | 02-10-2016 11:00 AM

Labor Market Still Showing Signs of Strength

A near-record number of employees quitting their jobs and signs that small-business owners are boosting wages are two more reasons to think the labor market remains in good shape, says Morningstar's Bob Johnson.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. After January's strong jobs report, I'm joined today by Bob Johnson--our director of economic analysis--to see if there are any other labor-market indicators that are showing strength.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, let's start with the JOLTS report, which is on labor turnover--something we've talked about before. Anything in that report that indicates to you that we are seeing further tightness in the labor market?

Johnson: It was a very good report any way you cut it, on many of the metrics that we look at. But the one that I want to really drill down and focus on today is the so-called "Quits Ratio"--that is, people voluntarily leaving their job to take another job. That number increased dramatically in the latest report to about 3.1 million quits. That's one of the highest numbers we've had since 2005, and it's really not that far off the all-time high on that number. So, we've had some pretty dramatic improvement there. Even as a percentage of the labor force--you could say, "Well, we've got a bigger population"--the Quits Ratio is up, and up near record levels. So, that's good news, but you might ask, "Why is that good news?"

Well, to take another job, maybe with higher pay or having some other characteristic of a job that you like, you have to quit your current job. And before an opening can be filled--there are only so many people that are new to the labor market--you've really got to persuade somebody to move over. The Quits Ratio acceleration seems to demonstrate that workers now have that confidence to move. So, that's a really, really good thing to see. And in last week's jobs report, we saw the wage component go up a fair amount, and there was some concern--some of it rightfully so--that perhaps increases in the minimum wage might be behind the number.

A very, very tiny fraction of the population is on the minimum wage. And there are certain seasonal factors in the numbers that adjust. Every year, a number of states increase their minimum wage. It's not always the same ones the same year, but that's certainly indirectly incorporated in the seasonal factor. So, I'm thinking that's not as important as the fact that people had enough confidence to quit and go take a higher-paying job, helping move up the level of wage growth.

Again, I do caution that even the wage growth in last Friday's report and the wonderful JOLTS report, with all of those numbers, we tend to have some months and some bad months with the general trend in the right direction. So, don't necessarily expect the same upward-and-to-the-right movement every month because these are not things that tend to move in nice, linear patterns. They tend to be a little bit stair-steppy. Again, on a headline basis and being over that psychologically important three-million level, that's really important to us and really supports our thesis that indeed labor shortages are becoming a problem.

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