Lack of job growth shows why Fed should hold on rates
The Bureau of Labor Statistics reported last week that in July, the economy created 215,000 jobs, the unemployment rate remained unchanged at 5.3 percent and hourly wages over the past 12 months grew by 2.1 percent. Meanwhile, consumer prices are up only 0.2 percent from a year ago.
These figures, when taken in context of trends developing throughout the year, have special significance because the Federal Reserve’s Open Market Committee will be weighing them in the coming months as it decides whether or not to start raising interest rates in September, as many observers expect they will.
While at first blush the July job gains appear bullish, the underlying trends remain worrying. Those suggesting the data make a September rate cut more likely, and desirable, should think again.
In making its decision, the Fed will be looking at the progress, or lack thereof, on two dimensions of the jobs crisis America has been experiencing:
- progress in closing the jobs gap (that is, the number of jobs lost during the Great Recession of 2007 to 2009, plus the number needed to keep up with labor force growth) and
- progress in reversing 35 years of stagnant wages and rising income inequality.
Taken together, the Fed’s decision should be easy: stay the course and don’t take any actions that would prematurely slow down the economy and dim hopes for progress in closing the gap and boosting wages. Inflation, another factor the Fed considers, is still barely existent, which means there is very little reason to lift rates just yet.
More importantly, I’m hoping the lack of progress on the second point finally helps jumpstart a national debate on whether the Fed should have an explicit wage growth target, just as it sets optimal rates for employment and inflation. Without significant and steady progress on the pay front, the American dream is in peril.
Let’s take a closer look at the July numbers with both dimensions in mind.
Progress in closing the jobs gap
Americans have been patiently waiting since the end of the Great Recession for more robust growth in the number of jobs.
From the end of the recession in January 2010 to mid-2013, jobs growth was anemic, ranging from a low of 88,000, on average, in 2010 to a high of 194,000 in 2013. If that pace had continued, it would have taken until 2020 or later to close the jobs gap. Fortunately, things began picking up in July 2013, with the number of new jobs averaging 245,000 per month from then through December 2014.
But recently the growth has slowed somewhat, averaging 235,000 in the last three months. According to the Brookings Institution’s Hamilton Project, the economy is still 3.3 million jobs short of closing the job gap. If the recent rate continues, we won’t manage to close the gap until early- to mid-2017 – about a decade after the start of the Great Recession!
The slowdown in jobs growth alone should be enough to give Fed policymakers concern. But there are other reasons to urge caution. Long-term unemployment (those out of work for 26 weeks or longer) remains stuck at about 27 percent of those without a job. The labor force participation rate refuses to recover, remaining steady at 63 percent, nearly four percentage points below where it was before the recession.
The number of discouraged workers who have given up looking for a job remains stubbornly high. And underemployment – a measure of whether workers are able to find full-time jobs that take advantage of their education and skills – continues to be a significant problem for young workers trying to start their careers.
Taken together, these data indicate the economy has a long way yet to go before it can provide the number and quality of jobs needed by the American workforce.
Addressing the persistent wage problem
The wage side of the employment report deserves equal attention from policymakers, including the Fed.
The 2.1 percent growth in wages over the past 12 months hardly makes a dent in the stagnant wages and rising inequality that have plagued the US economy and workforce for 35 years, as chronicled by the Economic Policy Institute think tank.
This suggests the growing chorus of voices that “America needs a raise” will continue. Indeed, as others have suggested, it is high time that we elevate the policy discussion on wages by setting a target or “norm” for wage growth.
We had such a norm before wages started stagnating in the 1980s. Before that, unions used collective bargaining to create and sustain an implicit social contract: wages should rise in tandem with increases in the cost of living and aggregate productivity growth.
This came out of the so-called “Treaty of Detroit” in a deal negotiated between the United Auto Workers and General Motors, which then spread through collective bargaining agreements across other industries. Unfortunately, unions no longer have the same influence they once did, one of the reasons wages have stagnated.
If we applied such a norm today, wages should be rising 3.5 percent to 4 percent a year. That’s based on the Fed’s optimal inflation rate of 2 percent and recent productivity growth of 1.4 percent to 2.6 percent (the latter took a big hit in the first half of 2015, probably reflecting the effects of the tough winter).
With that in mind, the Fed should definitely stay the course and avoid actions such as a premature rate hike that will end up slowing down the economy and the recovery in jobs.
But we should also start a national discussion over what a fair norm for wage growth should be in today’s economy and then figure out what needs to be done to achieve it.