Jobs report: no one wants to be incautious re inflation, but…Laissez les bon temps rouler!

May 3rd, 2019 at 9:43 am

Payrolls rose by a larger-than-expected 263,000 last month and unemployment rate ticked down to a 49-year low of 3.6 percent. Yearly wage growth held steady at 3.2 percent, which is also its average over the past 12 months (raising the question: are wage gains on pause?). Since consumer inflation is running at around 2 percent, this implies real wage gains of a bit more than 1 percent, a welcome development for workers who are clearly benefiting from the persistently tight job market (see more on the wage story below).

The tick down in the unemployment rate is not, however, as positive a sign as it appears to be, because it fell in April for the “wrong” reason: people leaving the labor market, not people getting jobs. This negative change should be discounted because the household survey (from which the unemployment and labor force rates are derived) carries a lot more statistical noise than the payroll survey (the 90 percent confidence interval for payroll employment is 110,000; for the HH survey, it’s over 500,000).

Our monthly smoother, which averages monthly job gains over 3, 6, and 12 month intervals, shows that the recent trend in monthly gains is a relatively low 169,000, but because this value is influenced by the unusually low February gain of 56,000, the other bars are more representative of the underlying trend of a bit north of 200,000 per month.

That’s a very solid number for this stage in our 10-year-old expansion, suggesting a virtuous cycle wherein strong labor demand is providing many working families with jobs and wage gains, which in turn fuels robust consumer spending. Remember, such spending comprises about 70 percent of our GDP, meaning that barring an unforeseen negative shock, these solid labor market dynamics should keep the recovery rolling for the near/medium term. It is also important to recognize that employers’ demands for more workers are being met by ample labor supply (again, discounting the April HH labor force decline). That implies less inflationary pressure, supporting the patient stance by the Federal Reserve. That is, jobs, wage, and inflation numbers all point to an economy that is certainly closing in a full capacity but still has “room-to-run.”

There’s been renewed attention on wage gains in recent weeks, as tight labor markets and, at the low end of the pay scale, higher minimum wages in some places, have helped boost worker pay. The next two figures show the yearly percent gains in hourly wages for all private sector workers and for middle-wage workers (the 82 percent of the non-government workforce that hold production, non-supervisory jobs). They clearly show the aforementioned acceleration but if you look carefully at the end of each series (i.e., the series themselves, not the smoothed trend) they haven’t accelerated in the past 6 months. This bears watching as it could suggest a ceiling on wage growth of around 3 percent. In theory, that ceiling be explained by the sum of productivity growth of 1 percent and inflation of 2 percent. However, truly strong worker bargaining clout would mean faster wage gains supported by a squeeze on corporate profits, i.e., diminished inequality.

Here are some aspects of the wage story I find most germane:

–The key point is well understood: tight labor markets boost worker pay. Why? Because, especially in an economy where just 6.4 percent of private-sector workers are union members, most U.S. workers have low bargaining clout, meaning unless employers are forced to compete for them, there’s little to channel much of the gains from growth their way.

–But research finds that it’s not just tight labor markets that makes a difference to wage growth: it’s persistently tight labor markets. It wasn’t until year 10 of this expansion that we began to see notably stronger wage gains. In other words, the goal for creating high-pressure labor markets isn’t just getting to full employment. It’s staying there!

–Productivity growth, as noted, is a constraint on wage growth. Right now, it’s running at a trend rate of about 1 percent, compared to around 2.5 percent in the last full employment economy of the latter 1990s. That’s one reason real wage gains are slower now versus then.

–Also as noted, the share of national income going to workers remains low given where we are in this cycle and the tightness of the job market. Re-balancing “factor shares”–shifting income from profits to wages–is another source of non-inflationary wage gains.

–That said, as I’ve shown in lots of places, and as this next figure shows, there’s been virtually no evidence of wage gains bleeding into price gains. Again, this is critically important from the Fed’s perspective.

Thus, while one obviously doesn’t want to be incautious regarding the possibility of future inflationary pressures, the correct monetary policy for the moment is the one they talk about down in New Orleans: Laissez les bon temps rouler!

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One comment in reply to "Jobs report: no one wants to be incautious re inflation, but…Laissez les bon temps rouler!"

  1. spencer says:

    Maybe you should also point out that the y/y CH: in unit labor cost is 0.1%.