I enjoyed the framing in Evan Soltas’ analysis on the debate over how much slack there is in the US economy. The “slackers” think we’re still facing sizable output gaps in GDP and jobs. The “quitters” think the job market is tightening up (based in part on recent movements in quit rates—more on that in a moment), and that wage and price inflation will follow.
Using many of the series and data point in Evan’s piece, let me explain why you should quit the quitters and kick back with us slackers. My main concern is that at a time like the present, US macro-management policy confuses improvement with “all better” and thus has the potential to stomp out gains just as they’re gaining momentum. Or to put it another way, as I’ve argued before, if we want to repair some of the damage that’s been done, the goal is to reach full employment or even beyond, and stay there.
First, quit rates (Dean Baker just beat me to this point). The theory is that when workers who are unhappy with their job become more confident about finding a better one, they quit. And, in fact, as you see below, quits are a cyclical indicator. Unfortunately, these data don’t go back very far, but even so, they’re maybe about halfway back to their pre-recession peak, and as far as we can tell, that peak was below the previous one at the end of the 2000s cycle, a period where labor markets were a lot tighter than they’ve been anytime since.
Source: BLS JOLTS data.
So, I’d say quits are moving in the right direction but barring other evidence of undue pressure, not flashing red. Not much to see here, folks…move along.
What else have the quitters got? Evan also points to the fact that all the cool kids these days are breaking the unemployment rate up into the short-term rate and the long-term rate, as you see here from the new Economic Report of the President. The short-term rate is back to its 2001-07 average while the long-term rate remains well above.
Source: 2014 Economic Report of the President
But here again, look at the latter 1990s—or even the latter 2000s. Both rates were below the averages. I don’t think an objective person would look at the end of the lines in the figure and conclude: “our work is done here, folks.”
Especially when you consider the real bottom-line indicators of slack. You know, like:
–the extent to which GDP is below its potential, which right now is about 4% of GDP, or around $700 billion (CBO);
–the extent to which the unemployment rate is above the full employment rate. And here, I disagree with Evan, who suggests 6.7% is “close to most estimates of unemployment’s natural level.” His links show estimates of 5.5%, and a) the current jobless rate is biased down by labor force exits—I’d add a percentage point to it, and b) Dean Baker and I think 5.5% is too high for the natural rate.
–the absence of wage or price inflation. No time to post figures on this, but they’re not hard to find. Price growth is especially quiescent and wage growth is flat or rising slowly (while inflation is decelerating).
End of the day, like a chronic dieter pushing away needed protein even when he’s clearly underweight, the quitters appear to be desperate to preempt any inflationary pressures. To them, the fact that inflationary expectations are low and “well-anchored” is a vital attribute for an economy that musn’t be trifled with.
But the danger here is not just that they’d pull the trigger (as in tighten monetary policy) too soon, killing off positive but far from complete trends like those shown above, though that’s a real danger. It’s that they’d miss the critically important benefits that could result from getting to or even going beyond full employment, including broad-based wage and income gains, improved bargaining power, and even probably repairing some of the damage to labor force participation.
To quit the field is to risk surrendering to permanent slack and depressed potential growth rates. I’d thus urge the quitters to take a closer look at the indicators above and join us slackers.