January jobs: “Goldilocks” rising–the labor market is strengthening at a faster clip but without inflationary pressures

February 6th, 2015 at 9:21 am

Payrolls were up a solid 257,000 last month and strong upward revisions to prior months’ payroll gains reveal an uptick in the pace of job creation in recent months. Wage growth got a slight bump and the labor force participation rate ticked up as well, in what is a uniformly impressive jobs report, another in steady line of reports showing that the economic recovery has reliably reached the labor market. While we are clearly not yet at a full employment economy, characterized by a very tight fit between the number of job seekers and jobs, we are moving in that direction.

Over the past three months, payroll growth has averaged 336,000 per month. A year ago, the comparable number was 197,000. My patented jobs day smoother, shown below, also captures the recent acceleration in net job creation, as the three month average is notably above that of six and 12 months.

Unemployment ticked up slightly, to 5.7%, as more people entered the job market than found employment. But especially given the accelerated pace of job creation, this is good sign, signaling the potential return (we don’t want to over-interpret one month’s move in this noisy series) to the labor force of sideliners who’ve been waiting for better prospects. The labor force participation rate ticked up 0.2% in January, replacing a decline of the same magnitude in December. At 62.9%, this important indicator has clearly stabilized at about 63%, where it’s been wiggling around for about a year now. That level remains three points below its pre-recession peak, and is thus symptomatic of remaining slack in the job market (there are also still close to 7 million involuntary part-timers who’d like full-time work, another indicator of ongoing slack). Still, its stabilization is good news.

Hourly wages, which fell in December, rose 0.5% in January and were up 2.2% over the past year, compared to 1.9%, Dec/Dec. Given recent gains in weekly hours worked, weekly earnings are up 2.8% over the past year. Moreover, with energy prices holding back inflation, up only 0.7% when last seen, this translates into some of the first solid real wage growth in the recovery.

There is an important caveat here: nominal hourly wage growth is not accelerating in any identifiable way. As I’ll show later today, this result holds over various wage measures. At the same time, as noted, price growth is slowing, and not just “topline” inflation, but also core inflation, the Fed’s preferred measure.

Thus, from the perspective of Federal Reserve policy makers, the current economy is building up some pretty solid “Goldilocks” credentials: GDP growth is stable at around trend, the job market is reliably tightening, yet neither wage nor price growth are signaling inflationary pressures. It is thus critically important to recognize that we are not yet at full employment, and even if we get there, we’ll need to stay there to repair the considerable residual damage still with us from years of deep recession followed by what began as a weak recovery.


Source: BLS, my analysis.

[Data note: today’s report included various revisions to both the surveys of households and firms. The payroll survey annual benchmark revision raised the level of payroll employment slightly, by 91,000, as of March of last year. The household survey revisions did not affect changes in rates cited above.]

Jobs day tomorrow!

February 5th, 2015 at 3:14 pm

IKR! So exciting!

My forecast is 210K for payrolls, which is below the BBerg consensus (below) of 230K. I expect monthly wage growth to tick back up as per the consensus–last month’s decline will be revised, so that will be worth checking, but as usual, I’ll take yr/yr changes to smooth out some noise.

That said, I wouldn’t be surprised if I’m off on the downside (i.e., if we get a stronger-than-expected pop on payrolls). Though growth slowed in the last quarter of last year, price declines at the pump have likely pumped up real consumer spending–even flat nominal wage trends go further with topline consumer inflation at less than 1% when last seen (yr/yr: 0.8%).


Source: Bloomberg

I’ll have first impressions, along with my patented jobs day smoother, up shortly after the release. Then, barring a last minute cancellation, some chin music over at MSNBC on the jobs numbers with Jose Diaz-Balart at 10:15’ish.


The policy goal whose name must not be spoken

February 5th, 2015 at 8:39 am

Back in my White House daze, while helping out with an economics speech to be given by a top senior official, I suggested a sentence that had the word “distribution” in it in the context of income or tax policy or something. Not even “redistribution.” Needless to say, editors went ballistic—they didn’t just cross it out, but that warned me to go through and make sure no such socialistic language was anywhere to seen.

I totally saw and see their point, by the way. The word’s a dog whistle that releases the hounds, if not the Foxes. And yet, one of my rules of thumb in this work is that when policy does a lot of something and that something cannot be spoken of, we’re courting dysfunction and distortion.

E.J. Dionne nicely captures all this in an oped this AM, wherein he points out that there’s of course there’s ton of redistribution afoot in government policy, and it is by no means in one direction, i.e., there’s a lot of policy which redistributes upwards. (I cited this same point yesterday in a tax debate.)

In fact, other than naming post offices and such, you’d be hard pressed to name a policy that doesn’t redistribute resources, tax dollars, or power either up or down the income scale. Of course, when it’s down the scale, it’s often derided as class warfare; when it’s up the scale, it’s giving the job creators their due.

However, as far as I can tell, there’s a huge gap in our knowledge here. We don’t know nearly enough, or at least I don’t, about the distribution of government spending. Propose a tax plan, and quant shops all over this town will have distribution tables up (showing tax changes by income class) before you can say “marginal rate.” But what’s the distribution of infrastructure or defense spending? We can easily imagine who gets helped by say a training program or an early Head Start program, but such information would be useful to see.

I recall back in 2013 seeing anecdotes of this sort when sequestration was cutting Head Start slots; I found them very powerful. So go forth, public-policy-school types, and crunch these numbers!

E.J. makes another point I’d like to highlight:

In fact, we need to pay far more attention to “pre-distribution,” the wages and benefits people get before government taxes or transfers money. It’s why we should increase the minimum wage, strengthen unions and find other ways of enhancing workers’ bargaining power. Funnily enough, progressives are more insistent than conservatives on increasing the market rewards for work so government doesn’t have to redistribute so much. In the meantime, the tax code and the various credits ought to be tilted toward those who have been lagging behind.

The inequality problem is largely a pretax phenomenon, and while we should enact the types of ideas in the President’s budget to help ameliorate the problem, this deep bargaining power deficit cannot be solved through the tax code alone. To be very clear, that’s not to be taken as downplaying at all the importance of the redistribution (I said it!) that Dionne highlights.

But it’s critical to get to the source, which, btw, is a key motivator for the full employment agenda I’m forever going on about. In an economy where union membership sits at a meager 11%, truly tight labor markets are one big way the average (and the median, and the 10th percentile, and so on) worker can glean some bargaining power. That’s also the punchline of this Baker/Bernstein book.

I leave it as an exercise to the reader as to whether we’d be better off if politicians could speak more forthrightly about the redistributive goals of their policies. As a straightforward guy strongly in favor of plain and crisp speech (and no, I don’t always meet that goal—we are, all of us, works in progress!), I’m certain the answer is “yes.”

What do you think?

Can tax policy distinguish between the rich and the rest?

February 4th, 2015 at 8:27 am

That’s the Room for Debate question over at the NYT. I weigh in here riffing off of the recent 529 screw-up. Despite the fact that CATO economist Jeff Miron and I wind up in diametrically opposed camps–I think the code should be more progressive (though I argue there’s no “middle-class exemption,” where “middle class” means almost everyone) and he clearly doesn’t–much of his argument seemed pretty spot-on to me. There’s a ton a upward redistribution through the tax and regulatory codes, as Dean Baker has also emphasized.

Though that’s an old story, it’s also the predictable outcome of high levels of wealth concentration and lots more money in politics, wherein the wealthy can buy and protect the policies that support their holdings. They also can and do buy the “think-tank” results they want to support their case, so good for Miron/CATO in calling out the upside-down subsidies in the system.