The solid jobs reports just keep rolling in. This morning’s report, for May, showed job gains of 223,000, well above what we were expecting, and the unemployment rate ticked down to 3.8 percent. That is the same rate as April 2000, but before that, you would have to go back to the 1960s to hit such low jobless numbers.
The African American rate fell to 5.9 percent, by far the lowest on record. Typically, the black unemployment rate is twice the white rate. But persistently tight labor markets are especially helpful for minority workers, as they make it costlier for employers to discriminate. In May, the black/white ratio was 1.7, still too high, but lower than average, underscoring the relative gains from tight job markets for less-advantaged workers.
Wage growth has been a soft spot in the recovery, especially given how low the jobless rate has been. This persisted to some degree in May, but there was a nice bump in the growth rate for middle-wage workers, which rose from 2.6 percent, year-over-year, to 2.8 percent.
Both that wage bump and the black jobless rate result underscore the punchline from the solid report: In an economy like ours, with little union power, tremendous finance power and, thereby, far too much inequality, the best friend for people who depend on their paychecks as opposed to their stock portfolios is a tight labor market.
All of which raises a very important question: What is out there that could whack these favorable trends?
I have three candidates:
- It is said the economic expansions do not die of old age; they are murdered by central banks. The Federal Reserve could raise interest rates too quickly, hitting the growth brakes harder than necessary and derailing the expansion.
- Trump’s trade war could, and probably will, escalate, raising prices and slowing growth through the export channel.
- The economy could bump up against the tapped out supply of labor. If the supply of available workers dries up, that will definitely constrain both job and overall economic growth.
How likely are each of these?
Barring a sharp acceleration in prices, which I judge to be unlikely, I think Federal Reserve Chairman Jerome H. Powell will be careful to keeping tapping, as opposed to slamming, the brakes on growth. So, I am not too worried about the Fed whacking the trend.
The trade war is more worrisome, but remember, relative to other countries, the United States is somewhat insulated to trade shocks as our imports as a share of the gross domestic product are 15 percent, compared with two and three times that share in most of the other economies with whom we trade.
The third risk — the labor supply constraint — is probably the most valid concern (putting aside the unknown, of course). The unemployment rate is already far below the Fed’s estimate of the lowest rate consistent with stable prices, but that fact, in and of itself, should be largely discounted. No one knows what that jobless rate is, and economists have highballed their estimates of it for decades, at great cost to those who get ahead only in truly tight labor markets.
In fact, I think the notion that the nation’s labor supply is fully tapped is not well supported by these monthly jobs reports themselves. First, if labor supply constraints were truly binding, we would not be posting these persistently strong monthly payroll numbers. Second, while the unemployment rate is very low, the employment rate for prime-age workers — the share of workers between 25 and 54 who have jobs — does not appear to have topped out. As I showed in a blog post this morning, that variable tracks wage growth a lot better than does the unemployment rate, meaning it is probably more indicative of the true degree of slack in the labor market.
Finally, while some price and wage pressures are building, these capacity indicators are clearly not flashing red. The figure below requires some unpacking, and I get that it is Friday afternoon. But stick with me for this and then, I promise: Class dismissed!
The figure shows the sharp decline in unemployment against the Fed’s estimate of the lowest unemployment rate consistent with stable inflation (called the “natural rate of unemployment” in the legend). As you see, we are well below the Fed’s full employment rate and have been for a while. So, wages and prices should be spiking, right? Well, they are in the figure, too, and they do not show much at all by way of spikes. Prices have climbed a bit of late, as you would expect, but remarkably, they are still undershooting the Fed’s 2 percent inflation target (the straight line in the figure).
We should thus vigilantly watch for all three trend whackers (and any others I have left out), but based on the critically important benefits of persistently tight labor markets — benefits that disproportionately flow to those who need them most — we should assume there is still room-to-run.
Now, what are you waiting for? Go start your weekend already!