There's plenty of good news, but plenty more that we still need. The economy, as you can see below, has added an average of 246,000 jobs a month the past year, up from 194,000 in 2013, and better than the best of the housing bubble. Remember, though, that now that the Baby Boomers are hitting their golden years, we don't need to create as many jobs as before to keep the unemployment rate from rising. Indeed, the Chicago Fed estimates that we only need 80,000 a month to do so nowadays. That, in large part, is why the unemployment rate has fallen so far the past two years, from 7.9 to 5.6 percent, the biggest 24-month drop since 1985 when you-know-who was beaming about Morning in America.
But unemployment hasn't fallen just because some people are getting jobs, and other people are retiring. It's also fallen because some other people who we'd expect to be working have given up trying to. So-called "prime-age workers" between 25 and 54 years old—too old to be in school, for the most part, and too young to be retired—aren't working or even looking for work as much as they were before the Great Recession.
Now, in any given month, it's hard to tell how many labor force dropouts are people who "should" be working as opposed to people who should be getting ready to collect Social Security. But in December, at least, the labor force's 273,000 person decline was part of the reason the unemployment rate fell from 5.8 to 5.6 percent. The participation rate, which shows how many people have a job or are looking for one, ticked down to 62.7 percent, tying a 38-year low. That's not so good.
You know what else isn't good? Wages. It looked like they were starting to go up a little bit more in November, but that was a statistical illusion that got revised down, and then reversed in December when average hourly earnings fell 0.2 percent. In the past year, wages are only up a (choose your own adjective) weak, anemic, or lackluster, 1.7 percent. That's no better than when the recovery began, and still far below the 3 to 4 percent they were rising before the recession did—and should be again now. The only consolation, and it's not a bad one, is that oil prices have fallen so far that even 1.7 percent wage growth is enough to easily outpace inflation, and boost workers' real take-home pay.
Still, it's a little surprising that wages have stayed stagnant despite declining unemployment. That's not supposed to happen, not when joblessness is under 6 percent. Indeed, unemployment is already near the semi-mythical "natural rate" of, the Fed guesses, 5.2 to 5.5 percent, where inflation is supposed to start accelerating. The idea is that workers have more bargaining power when there aren't as many people out of work—so they can demand higher wages, which turns into higher prices.
That this hasn't happened tells us that there's still a decent amount of slack in the labor market. And that's clear enough if you look at how, even now, millions of people can only find part-time jobs when they want full-time ones, or have been looking for work for six months or longer. That means the Fed can, and should be, much more than just patient about raising rates from zero: there's no inflation, and no reason to expect any inflation anytime soon. Not only that, but there's plenty of room for the recovery to keep growing, like it has the past year, without it becoming bubbly—if the Fed will let it.