Jobs Day: Slower payroll growth but faster wage growth as we get closer to full employment

February 5th, 2016 at 9:30 am

Job growth slowed in January, as the nation’s employers added 151,000 net new jobs, compared to over 250,000 in each of the prior three months. However, while slower job growth may be a function of recent market volatility and slower growth abroad, it is far too soon to draw any such conclusions from one month’s data. As my monthly smoother shows, average employment gains are solidly over 200,000 in recent months, and if this underlying trend persists, the labor market will continue its steady trek towards full employment.

Unemployment ticked down slightly to 4.9 percent, and for the “right reasons”—i.e., more people got jobs as opposed to more people gave up looking. Average hourly wages were up 2.5% over the last year—that’s an acceleration over the 2% pace that prevailed earlier in the recovery, signaling that the tightening job market may finally be giving workers a bit more in the way of bargaining power, something they’ve lacked for  a very long time. I return to this critically important point below.

The average work week ticked up a bit as well, and 60 percent of private sector industries added jobs, including an unexpected pop in factory jobs, up 29,000 last month, the sector’s strongest month since November of 2014.

In other words, despite the slowdown in payroll gains, today’s report should be considered yet another entry in a series of quite positive jobs reports.

Remember, these are sampled data, and the monthly confidence interval in payroll gains is 100,000, meaning that the true monthly number of net jobs added is likely between 50,000 and 250,000. That’s why it’s useful to smooth out the monthly bips and bops using JB’s patented smoother, shown below. Over the past three months, the average monthly gain has been about 230K, and the other bars show this has been around the trend growth rate for the past year or so.

Source: BLS, my calculations

Source: BLS, my calculations

Now, on to this month’s Rorschach test. Focus on the hourly wage growth line (orange?–I’m color blind!) in the figure below (I’ll get to the other line in a moment). That circled bit at the end shows the acceleration I referred to earlier, and it is very much what I and other fans of tight labor markets have predicted (and longed for!) for quite a while now (this is the average wage, but, importantly, production worker wage growth is following a similar pattern).

Sources: BLS, BEA

Sources: BLS, BEA

Do you see that uptick and think, “Great—we’re getting closer to full employment and that means that the benefits of growth might have a chance to be more broadly shared! USA! USA!”? To be clear, we’re not yet at full employment. The underemployment rate (U-6) has been stuck at 9.9%; my estimate is that it needs to be 8.5% before we’re there.

Or do you look at the line and say, “Janet, slam on the breaks!”? IE, as wages growth faster, you worry they’ll bleed into prices and the Fed better act now to preempt that possibility.

If that’s where you’re coming from, and I sincerely hope it’s not—remember: periods of full employment have been the big exception over the past 40 years—then look at the other line, which plots PCE core inflation, the Fed’s preferred metric of price pressures. It is not showing any commensurate acceleration. True, the Fed needs to look around the next corner in this regard, but if anything, expectations are deflationary, in no small part due to the headwinds from the strong dollar and sharply slower growth in emerging economies.

Such headwinds remind us that there are unquestionably economic jitters out there in the world that bear close watching. But the US job market continues to truck along, adding over 200,000 jobs per month on average over the past year, helping to push the unemployment rate closer to full employment, and, most importantly, providing workers with a bit of the bargaining power they need to finally claim their fair share of the growth they’re helping to produce.

“I’ll have the wage mash-up with a side of low inflation”

February 4th, 2016 at 3:27 pm

So, with the productivity data out this AM–such as it was–I’ve now got the five wage and compensation series I need for the latest version of our patented wage mash-up (details here). I added a trend this month so you could see the bit of acceleration at the end of the series. That’s good to see as it suggests the tightening job market is likely delivering a bit of bargaining power to workers who’ve seen way too little of that for way too long (some parts of the country are clearly already at full employment).

Inflation’s very low so even these modest 2%’ish gains translate into faster real wage growth. And from the Fed’s perspective, that’s the key point.

In case they’re busy, I’ve taken the liberty [street] to make my friends over there a handy checklist:

Tighter job market, check;
Slight nominal wage acceleration, check;
Inflationary pressures, NOT CHECK!

Feet off of brakes, double-check!

Source: BLS, my calculations

Source: BLS, my calculations

The FEPM (full employment productivity multiplier)

February 4th, 2016 at 2:31 pm

Over at the WaPo, I speak to the existence of an FEPM. Hard to prove–I think you’d probably need to track individual firms over time–but I’ll bet it’s operative. I’ll note without comment that according to a BLS release this AM, productivity fell 3% in the first quarter. Now, that didn’t happen–noisy quarterly data. But the average for 2016 was 0.6% and average yearly growth has been less than one percent since 2011. (OK, that wasn’t without comment but this is one of the most serious economic constraints we face.)

Source: BLS

Source: BLS

Clarifying my take on dueling trade models

February 2nd, 2016 at 3:38 pm

[See “update” at end of post–JB]

The NYT reported on this presentation yesterday at which I spoke on the results from a new trade model, by economists from Tufts University, of long-run growth outcomes from the TPP.

The Times piece characterized me as there to “support the authors.” That’s correct. But I want to be very clear about the difference between supporting the authors and believing their model. My comments at the session were clear on this point, but in the interest of personal consistency and smart policy making, let me reiterate here. I think my points were nuanced, perhaps too much so in the hurly-burly of this often unfortunate trade debate.

The argument is between dueling models of the TPP’s growth effects. The Peterson Institute (PI) touts a “CGE” model; the Tufts (T) folks use a different model. Their paper–linked above–does a good job explaining the differences in approach and results. The PI model predicts that US GDP will be 0.5% higher by 2030. The Tufts model predicts it will be about that much lower after 10 years.

I don’t believe either result. That is, as I stressed in my comments, the idea that we can reliably predict an impact of this magnitude, 10-15 years from now, from a 12-country, 6,000 page trade deal, should not be taken even the slightest bit seriously (better yet, the PI model predicts 0.1% growth from the TPP–$1 billion–by 2020). The authors of both studies should be very clear about this point–such quantitatively small impacts cannot be reliably distinguished from zero impact.

So why was I there? Well, first to make that point. If the policy community and the press want to make an informed decision about the TPP, they should not do so based on these models. I’m somewhat shocked that more US economists–including those who generally support trade expansion–are not saying the same thing (FTR: Dani Rodrik excepted: “[the models] give us a sense of precision that really doesn’t belong there.”)

Second, to point out that the T model at least makes more reasonable assumptions than the PI model. The latter assumes full employment, balanced trade, and no changes in the distribution of wages and profits.

Dean Baker’s been hammering this balanced trade point, quoting from the PI’s study: “The model assumes that the TPP will affect neither total employment nor the national savings (or equivalently trade balances) of countries.” He writes:

In the wake of the Great Recession many of the world [sic] most prominent economists (e.g. Larry Summers, Paul Krugman, Olivier Blanchard) no longer believe that the economy will automatically bounce back to full employment. They now accept the idea of “secular stagnation,” which means that economies can suffer from long periods of inadequate demand. If secular stagnation is a real problem, then there is no basis for assuming that the demand and jobs lost due to a larger trade deficit can be offset by other policies.

The T study relaxes these assumptions, and it makes a difference in their findings. That doesn’t mean they’re right. As I’ve said, “right” when it comes to the TPPs impact on growth 5, 10, 15 years from now is beyond our modelling capability. But I was there to support their effort to at least try to see what happens when the modelling exercise plugs in more realistic assumptions. And as economist Josh Bivens likes to point out, these models’ results are hugely driven by their assumptions.

So how do we decide whether or not to support the TPP? We do the hard work of rolling up our sleeves and seeing what’s in and what’s not in the beast. I’ve been trying to do so, and below, you can see my latest take, pasted in from testimony I just gave this AM before the Ways and Means committee (note: CBPP does not generally take a position on trade policy).

As you will see, I do not oppose the agreement. These trade agreements are no more than “rules and the road” for countries engaging in trade, and such rules can be useful. Or they can be damaging, both to our own interests and those of emerging economies (e.g., patent protections which make medicines more expensive). The only useful way forward is to focus on these institutional arrangements, ask who’s being fairly and unfairly represented, and what procedures are being put in place to enforce rules and resolve differences.

The 12-dimensional macro models trying to get us to believe that they’re accurately predicting gains and losses decades out are worse than implausible. They’re a distraction from the serious work.

Trade

Given this committee’s role in international trade and trade agreements, I wanted to note a few points and concerns regarding the Trans-Pacific Partnership, or TPP, from the perspective of economic growth and opportunity.

Contrary to simple textbook trade theory, the increase in international trade has not been an unequivocal good for all working families. In fact, more realistic theories of trade are quite clear on the point that trade creates winners and losers, with the latter typically including those thrown into competition with cheaper workers abroad. Still, our highly productive workforce can compete globally, as long as the playing field is not tilted against them.

If the benefits of trade are to be more broadly shared, two things have to happen. First, our trade agreements must be more than handshakes between investors. They must provide workers from all signatory countries with the rights and protections they need to capture some of the benefits of trade. Second, we in the US must be able to lower our large and persistent trade deficits through enforceable rules against currency interventions that give our trading partners an unfair price advantage.

The TPP goes further than past agreements in various ways that could protect workers both here and in other signatory countries from unfair labor and wage practices. For example, the USTR worked out bilateral “consistency plans” with Vietnam, Malaysia, and Brunei that specify ways these countries must change their laws and practices to meet the general obligations in the TPP’s labor chapter. Of course, such provisions underscore the need for stepped up enforcement, an area where the US record has not been strong enough. A nonpartisan Government Accountability Office survey of this issue concluded that “monitoring and enforcement [of labor provisions in prior trade agreements] remain limited.”

An even greater concern is the absence of a consistency plan for Mexico, particularly because US auto production has been sharply increasing there. Mexican workers are typically unable to unionize or collectively bargain, and they make less than a fifth of what US autoworkers are paid. This combination of accelerated outsourcing of auto production to Mexico and suppression of workers’ rights there reduces living standards and increases inequality on both sides of the border.

Thus, in the spirit of trade that is both pro-growth and pro-worker, I urge this committee to carefully consider both enforcement and oversight provisions in the TPP, and the need for a plan to improve labor rights in Mexico.

On currency, the existing side agreement to the TPP has some positive features but no enforcement mechanism. As economist Joe Gagnon points out, the “TPP partners merely reiterate the obligation they already have as members of the International Monetary Fund (IMF) to ‘avoid manipulating exchange rates … to prevent effective balance of payments adjustment or to gain an unfair competitive advantage.’” The side agreement may well provide the information needed to quickly identify currency manipulators, but voluntary agreements only work if key actors, such as those at the US Treasury, take corrective action in the face of evidence. Unfortunately, our history here is lots of evidence and virtually no action. In the face of obvious currency management by China, for example, the US Treasury has been extremely hesitant to label them a currency manipulator.

The absence of a currency chapter in the TPP suggests the need for Congress to legislate enforceable currency rules outside of the trade agreement. For example, back in 2010, this chamber, while no less divided than it is today, overwhelmingly passed legislation that, if it had been enacted, would have allowed the Commerce Department to treat currency management as an unfair subsidy, calling for countervailing duties. Given the long history of voluntary measures being inadequate to the task of pushing back on currency manipulation, such enforceable rules would be preferable to the voluntary approach.

Other aspects of the TPP also warrant close scrutiny. The fact that investors are using the investment dispute settlement procedure under NAFTA to challenge the administration’s decision on the Keystone pipeline underscores the importance of making sure our sovereign rights are adequately protected. The agreement also has weaker rules of origin for automotive products than past trade agreements (e.g., NAFTA), which could hurt employment opportunities along our supply chains for cars and car parts.

Update: Jeronim Capaldo, one of the authors of the T study, writes me a note in which he expresses agreement in all of the above. He says, “I find the debates on half percentage points in projections almost grotesque.”

He goes on:

However, as far as I can tell, this very reasonable point does not get a lot of traction in the public debate. My hope is that by offering alternative numbers we can stimulate some interest in what’s underneath the various explanations. The diatribe about +0.5 and -0.5 is ridiculous but the debate about what changes we can expect from TPP or other forms of liberalization seems important to me.

This said, if I may suggest a slightly different perspective, I’d say that both models are equally “accurate” (very little!) but not equally “plausible”.

That last point is well taken, especially since one of the points of my post was that the assumptions in the T model were a lot more realistic than those of the PI model.