Despite bold headlines about “full employment,” US labor market may not be as strong. Jobs growth is not inducing wage growth in America.
IN a major policy shift to a more liberal regime, the BangkoSentral’s new governor Nestor Espenilla Jr. is reportedly paving the way for a “counter-intuitive” relaxation of restrictions on the trading of foreign exchange, securities and derivatives.
The Philippine central bank is downplaying the inflationary impact of peso depreciation. Since late June, the peso has been trading at its near 11-year low, the lowest since 2006, pressured by anticipation of monetary policy tightening in the US. While that policy path is officially “data-dependent,” that data no longer acts as it once did.
Last week, Federal Reserve chair Janet Yellen told Congress that the US economy is gathering strength, warranting further gradual increases in the Fed’s benchmark interest rate and a reduction in its balance sheet later this year.
After five years of steady hiring, unemployment rates have fallen below 4 percent in 23 US states. When unemployment falls that low, businesses used to raise pay to compete for scarce workers. Yet, current wage gains in the US remain at about 2.5 percent a year, below the 3.5 percent pace normally associated with a healthy economy.
Something is off in US labor markets.
Troubling structural trends
Since early 2010, US employers have added on average almost 190,000 jobs a month, while annual growth has averaged 2.1 percent since then. While the performance is significantly higher than that of Europe, it remains substantially lower than US performance in the past.
According to the most recent jobs report in July, job growth is surging. And yet, some of the June job additions were fueled by temporary drivers. The gain of 35,000 jobs in state and local government was preceded by a loss of 8,000 jobs in the sector in May. Other gains reflect school districts’ new hires for the fall. Also, the retail sector added over 8,000 net new jobs; but only after losing almost 80,000 jobs between February and May, due to the ongoing shift to online retail.
Furthermore, much job growth was due to hiring in healthcare, social assistance and local governments, which are coping with an aging and ailing population.
Most importantly, since unemployment is low, employers should be raising wages to attract new workers and keep existing ones, yet that’s precisely not the case today. Instead, some of the biggest job gains are taking place in lower-wage sectors, such as healthcare and temporary workers, which keeps wage growth down.
In the postwar era, strong expansions occurred amid improving civil rights. Today, that environment is stagnating, too. US unemployment rate is relatively lowest among whites (3.8 percent) and Asians (3.6 percent), almost a fourth higher among Hispanics (4.8 percent), and nearly twice as high for blacks (7.1 percent). Even worse, the unemployment rate for youths (13.3 percent) is three times higher than for all unemployed.
In the US, the labor force participation rate – the number of people who are employed or actively looking for work – peaked at 67 percent in the early 2000s, but is less than 63 percent today, where it was in the mid-1970s. Unlike labor force participation rate, employment-population ratio is not as affected by seasonal variations or short-term fluctuations. In the US, it was almost 75 percent in the early 2000s; but today barely 60 percent as fewer young Americans are looking for work and baby boomers are retiring.
Clearly, times are changing.
End of Phillips curve – and Yellen era
The simple fact is that the US economy continues to pay the bill for the crisis of 2008-2009 and the preceding three decades of misguided fiscal and monetary policy. Indeed, the depth and breadth of employment losses during the global financial crisis contrast sharply with all other US postwar recessions.
In the past half a decade, the US has not so much enjoyed the “greatest postwar expansion” but the longest employment recovery time following any recession since 1939. During this recovery, the net job gains have not surged as in the Reagan 1980s and the Clinton 1990s, nor did they increase gradually as in the Bush 2000s (see graph.)
Most importantly, none of the previous postwar recoveries was predicated on ultra-low interest rates and $4.5 trillion of quantitative easing that have supported this “recovery.” Not surprisingly, the Fed is growing more cautious.
Yellen believes in the so-called Phillips curve, a historically inverse relationship between rates of unemployment and corresponding rates of inflation. In this view, decreased unemployment means higher rates of inflation. Since US unemployment rate is now only 4.4 percent, it should translate to progressively rising inflation. The problem is that it doesn’t.
Until early 2017, as unemployment rate steadily decreased, hourly earnings climbed close to 2.9 percent. But in the past few months, unemployment rate has remained around 4.4 percent, whereas hourly earnings have decreased to 2.4 percent. Yellen sees this as transient but what if the Phillips curve no longer prevails?
Historically, a short-run tradeoff between unemployment and inflation reflected the postwar Keynesian era when the rates climbed from 2 percent in the 1950s, peaking at 20 percent in early 1980s. In the past three decades, the rates have shrunk to zero. Yet, Yellen’s Fed continues to rely on the Phillips curve to guide monetary policy.
Today, the Fed needs a rethink. When rapidly rising inflation is a risk, monetary assertiveness is warranted. But if the theory associated with the current policy path is untenable, it cannot provide appropriate guidance.
If anything, new data is likely to reflect soft inflation and lingering wage growth. As a result, spring 2018 could witness not just the removal of the Phillips curve from the Fed, but possibly the replacement of Yellen at its top.
Dr Dan Steinbock is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see http://www.differencegroup.net/