Signs of Stability, Signs of Strain

April's Jobs Day is Friday. The labor market is stabilizing, but higher energy prices are eating into paychecks — and a new Fed Chair will soon have to make sense of both.

Signs of stability.

There have been encouraging signs in the labor market leading up to Jobs Day.

Job creation: Though monthly payrolls have swung up and down (dashed line in the chart) since the summer of 2025, the average pace has picked up. In the four months ending in March 2026, monthly job creation averaged nearly 50,000 (the solid line). While historically modest, it is the strongest four-month pace in almost a year.

The consensus forecast for April payrolls of about 60,000 would (barring revisions) move the average pace slightly higher. Estimates for April from ADP (109,000 private payrolls) and Revelio (66,000 total payrolls) were even above consensus. Even if payrolls surprise to the downside, as I suspect they might, or prior months are revised down, as has frequently been the case, the theme of stabilization should hold.

Unemployment rate: The sharp reduction in immigration over the past two years and ongoing population aging imply that very little job creation is necessary to keep the unemployment rate stable. In fact, the modest improvement in payrolls recently has coincided with modest declines in the unemployment rate. The unemployment rate in March was 4.3%, close to its level early last year. The consensus is for the rate to hold steady in April; the low level of initial claims for unemployment insurance during the past month is consistent with low, maybe even declining unemployment.

An improvement in the labor force participation rate, which has declined since late last year, could push the unemployment rate up modestly. As I've argued before, shifts in labor supply have made payrolls harder to interpret — low numbers are good enough numbers now. They can also affect the unemployment rate. The chart below decomposes the change in the unemployment rate since January 2023 (black line) into contributions from employment (blue bars) and the labor force (orange bars).

Increases in the labor force boosted the unemployment rate a few years ago, including when the Sahm rule triggered in the summer of 2024. More recently, declines in the labor force have held the unemployment rate down. As the labor market’s tone improves, we could see a ‘good news increase’ in the unemployment rate as participation picks up.

Allowing for the inevitable surprises, the April employment report is likely to extend the recent theme of stabilization.

Buffering higher gasoline prices.

A stable labor market is an improvement over last year, but it may not be a sufficient buffer against the higher costs since the conflict in Iran began. Energy prices are up sharply: the national average for gasoline (black line in chart) is more than $1.50 higher than before the conflict. The increase in diesel (red line) is even larger.

A stable labor market is an improvement over last year, but it may not be a sufficient buffer against the higher costs American families are facing since the conflict in Iran began in late February. Energy prices are up sharply: the national average for gasoline (black line in the chart) is more than $1.50 per gallon higher than before the conflict. The increase in diesel (red line) is even larger.

Higher prices, particularly for a necessity, reduce people's purchasing power. Higher wages, which increase a family's income, help buffer the hit. The April report's wage readings will be particularly important. Wage growth has slowed in recent months, but until recently still outpaced inflation; with the surge in energy prices, those inflation-adjusted gains are evaporating.

The buffer is also uneven. During 2021-22, lower-wage workers saw notably faster wage growth than higher-wage workers, which softened the hit to their purchasing power as inflation surged. That advantage has reversed: wage growth has slowed more for lower-wage workers, and their wages are now growing slightly slower than those of higher-wage workers. With inflation expected to rise further, low-wage workers face this energy shock without the extra buffer they had last time.

Bringing it back to the Fed.

Deciphering signs of stability in the labor market and assessing whether the labor market is buffering households are exactly the kind of questions the Fed will need to weigh. The Fed’s leadership transition adds another layer of uncertainty. The April employment report will be the first for Kevin Warsh to comment on as Chair (Powell’s tenure ends next Friday, and Warsh’s Senate confirmation is set for next week). As I argued in my recent Bloomberg Opinion piece, we know little about how he thinks about the labor market:

Warsh gave a perfunctory nod [at his confirmation hearing] to the Fed’s dual mandate — price stability and maximum employment — in last week’s testimony, but while he extensively discussed the former, he essentially ignored the latter. The two goals, enshrined into law in 1977, are coequal under the statute, but in practice, the Fed has historically given precedence to price stability. As Fed Chair Paul Volcker put it in 1981: “We will not be successful, in my opinion, in pursuing a full employment policy unless we take care of the inflation side of the equation.” Over the past 20 years, the Fed has moved away from that inflation-first view, building a more rigorous understanding of what maximum employment means and how to pursue it.

As he is when it comes to much of what the Fed does, Warsh is a vocal critic of the Fed’s thinking on maximum employment. In a speech he gave a year ago, he charged that, by describing maximum employment “as a broad-based and inclusive goal,” the Fed had “redefined its legislative remit” and signaled “a willingness to accept higher inflation so that certain groups would achieve higher rates of employment.” That reading gets both the Fed and the labor market wrong.

“Broad-based and inclusive” reflects US labor market dynamics, not a plan to be soft on inflation. The reality of maximum employment is that the last worker hired before inflation heats up does not look like the first. For example, the Black unemployment rate is almost always twice the White unemployment rate — except late in an economic expansion. At the first sign of softening, the gap reopens. Employment rates also differ markedly by gender, class, education and other characteristics.

Acknowledging those patterns is not “mission creep,” as Warsh often asserts. It is simply describing characteristics of the labor market the Fed is charged with maximizing.

All eyes are on inflation right now, so gaps in thinking about the labor market may not matter immediately. But conditions can change, and how much buffer the labor market provides could become central to the Fed's calculus as the year wears on.

In closing.

Jobs Day is a good time to take stock of the broad contours of the labor market. The headline numbers on jobs and the unemployment rate are a good starting point. But with low labor supply growth and a pickup in inflation, it takes more than usual to evaluate the quality of the labor market.