This article originally appeared in The Hill on June 01, 2018.
Big mystery of our economy is whether it can keep up on jobs
It is in the nature of economic expansions that they tend to move in straight, flat lines. With respect to the employment situation, that means a constant, low unemployment rate, and relatively steady employment growth roughly equal to the number of new entrants into the labor force.
This expansion is different, just as the economic downturn that begat it was different. The financial crisis of 2008 was the worst economic catastrophe since the Great Depression. The economy fell so far that it had an unprecedented (in the living memory of virtually all Americans) amount of slack to take up. Ever since, the straight line of the unemployment rate has been not flat, but down.
But the unemployment rate cannot fall forever. At some point, it will need to flatten out at a sustainable minimum (dictated by the numbers of new labor force entrants looking for work; layoffs and dismissals; and voluntary job leavers hunting for better jobs) – or it will bounce back upward, when rising wages trigger inflation (what economists in their mathematical equations typically designate as “p-dot” – a letter “p” with a dot above it – which indicates the change in prices) and tightening monetary policy from the Federal Reserve. At that point, economic growth slows – not the favored outcome.
The long-simmering question is when and how and why the unemployment rate’s straight line will bend this time around. It didn’t bend this month. The unemployment rate declined again, to 3.8 percent. It has been flat or declining in 84 of the 103 months since it topped out at 10.0 percent in October of 2009. Defying history, it has shown no signs of flattening out even as it has plumbed historic lows – declining 1.0 percent since January of 2017.
When, and how, will this straight line recognize that it cannot continue downward forever? Two indicators tell the same story. The best outcome on several scores would be if the many adult Americans who became discouraged and idle in the financial crisis would jump up from the sidelines of the labor market and get back on the playing field, looking for jobs. The labor force participation rate dropped from about 66 percent at the start of the financial crisis to about 63 percent by 2013.
More Americans rejoining the job market could allow the economy to grow even if the unemployment rate remained constant. No such luck. The labor force participation rate remains stuck below 63 percent. Part of the story must be the aging of the U.S. population; the growing numbers of seniors are not likely to seek to go back to work.
So that suggests that a tightening labor market will tend to drive up wages, and eventually inflation. Labor costs are about two-thirds of the total costs of production in our economy, so prices are sensitive to wage rates. It takes a sharp eye to discern a trend, but beginning in about 2013, wages seem to have begun a slow but steady climb.
Don’t take this wrong. Wage growth is the holy grail of economics; not only economists long for it. But to be sustainable, wage growth must be driven by productivity growth. And to date, for all of the flashy technology that we see in every pair of hands on every sidewalk, there is very little productivity growth to be seen in the data.
Inflation is not roaring away, either. Virtually every market for goods and services is enormously competitive, and so producers are pinching every penny to remain affordable to consumers. Why that has not shown up in the numbers as productivity growth is an enormous mystery.
So mystery is the story of the day, or rather the month of May in the job market. There is as yet no obvious end point to the steadily declining unemployment rate. New jobs (223,000 in May) are being created, but new workers are not returning from the ranks of the discouraged. Wages are growing, but sellers are keeping a cap on prices. All of that is good, but current trends cannot go on forever. To continue on this path, we need greater labor force participation, and faster productivity growth.
This morning’s employment situation report does not show the former, and other data do not suggest the latter. The end is somewhere out there, as the dreaded “p-dot” raises its head, interest rates rise, and the economy begins to slow. Hopefully, not soon.
Joseph J. Minarik (@JoeMinarik) is senior vice president and director of research at the Committee for Economic Development. He served as chief economist at the White House Office of Management and Budget for eight years under President Clinton. He previously worked with Sen. Bill Bradley (D-N.J.) on his efforts to reform the federal income tax, which culminated in the Tax Reform Act of 1986. He is coauthor of “Sustaining Capitalism: Bipartisan Solutions to Restore Trust & Prosperity.”