The November jobs report is critical. Watch the labor force participation rate.

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Given Federal Reserve Chairman Jerome Powell’s recent pivot toward a hawkish stance on inflation, The November jobs report is more important than it could have been. Investors will learn Friday morning the degree to which the US labor shortage has persisted last month, as much of the outlook for economic and monetary policy hinges on whether millions of workers have begun to return to the workforce.

The Labor Department releases its latest employment status report at 8:30 a.m. ET on Friday. Economists polled by FactSet expect to see an increase of 535,000 in nonfarm payrolls. That would roughly match hiring in October. As important as this is, the number of people hired should fall back to two significant figures: the labor force participation rate and average hourly wage.

Testifying before Congress earlier this week, Powell surprised markets by suggesting that the term “temporary” be eliminated in relation to inflation. He also reiterated that the latest wave of Covid poses a greater threat to price stability than growth. Powell suggested that if a growing number of infections and the threat from the new Omicron variant disrupt the long-awaited return to work, supply chain problems will worsen and lead to more inflation. The November jobs report is the last major labor market reading ahead of the Federal Reserve’s December 14-15 policy meeting, where officials will discuss accelerating the pace of cuts in their emergency bond-buying program.

In October, the labor force participation rate missed expectations of an increase and settled at 61.6%. It hasn’t crossed the 61.7% level since the economy came out of lockdown, and the current participation level is the lowest since the 1970s (excluding lockdowns in 2020). For months, economists have predicted a mass return to work as in-person schooling resumes and generous unemployment benefits end. is november month When the workers finally came back in a purposeful way?

Lydia Bosor, an economist at Oxford Economics, doesn’t think so. It expects a slight improvement in the labor force participation rate to 61.7%. Looking ahead, she is more optimistic and predicts that historically tough labor market conditions – which translate to higher salaries – will help attract people back into the workforce. She sees the participation rate rising to around 62.6% by the end of 2022. But there is a big caveat. It says there is a risk that the spread of the Omicron variant could delay the recovery in participation, prolonging supply shortages and exacerbating pricing pressures.

With the labor supply still in short supply, economists anticipate another big increase in wages. Bosor expects a 0.5% month-over-month jump in average hourly earnings. An increase in that volume would push the annual rate to 5.1%, the highest rate since early 2021, when the so-called core impact artificially squeezed the chain due to comparisons to the numbers affected by the shutdown a year ago.

Bosor says wage growth is likely to continue to accelerate in the coming year, with the number of workers leaving their jobs voluntarily at an all-time high, and a record share of small businesses planning to increase compensation. While an increase in workers’ salaries is not a bad thing, economists fear that rapid increases in wages signal a kind of wage-price spiral in which wages and consumer prices chase each other. In his testimony, Powell expressed new concerns about the rapid pace of wage inflation.

Another month of weak labor force participation and hot wage increases will reinforce fears that the Federal Reserve is about to become less favourable at a time when COVID uncertainty is rising again. Any improvement in participation would be welcome news, potentially giving central bankers a little more breathing room.

For more news and analysis, check back after 8:30 a.m. Friday

Write to Lisa Belfuss at the address lisa.beilfuss@barrons.com