The economic recovery still has miles to go before it sleeps — if, that is, the Federal Reserve will let it.
That, at least, was the message of the latest jobs report, which showed an economy growing like unemployment was 8.1 percent instead of the 4.1 percent it is. Which is to say that we’re not only adding more jobs than you’d expect at a time when, by historical standards, they’re already plentiful, but also that those jobs aren’t giving people the kind of raises you’d think they would. Tight labor markets, after all, are supposed to make companies compete over workers by pushing up pay. But we aren’t seeing that. That suggests our 17-year-low unemployment rate isn’t low enough. Maybe, as Fed Chair Jerome Powell speculated the other day, it could drop to as far as 3.5 percent.
Maybe we should find out.
Now, I know it sounds more than a little strange to wonder how low unemployment can go. Why not just try to get it as close to zero as possible? Well, the answer has to do with something economists call the “natural rate of unemployment.” That’s whatever the lowest it can be is before inflation starts to rise. The idea is that lower unemployment leads to higher wages, and higher wages eventually eat into companies’ profits enough that they have to increase prices. So the Fed, which takes its 2 percent inflation target as seriously as possible, doesn’t want unemployment to get much below this Goldilocks level.
The only problem is nobody knows what that is. The Fed used to think it was around 6 percent unemployment, then 5 percent, now 4 percent, and, who knows, maybe even a little lower than that. It certainly seems that way today.
That’s because nothing that’s supposed to happen when the economy is at full employment is in fact happening now. Indeed, the economy just added 313,000 jobs in February to bring its three-month average up to a very robust 242,000, with nary a wage increase in sight. That, as you can see below, isn’t an economy that’s slowing down. It’s one that, with the exception of the brief burst from late 2014 through the end of 2015, is adding jobs at about the same rate as it has for the rest of the recovery.
Here’s why this matters. If the Fed thinks we’re getting close to full employment, then we will be. It’ll start increasing interest rates to stop inflation from taking off, and slow down job growth in the process. The Fed, then, needs to be sure that it needs to do this before it does. Otherwise, it’ll keep a lot of people from getting jobs for no reason at all.
Now, as recently as a month ago, you could semi-plausibly tell yourself that we were getting close to that point. Wage growth, you see, had just come in at a post-recession high of 2.9 percent, which seemed to vindicate everyone who thought that unemployment couldn’t go much lower. It was enough to send markets into a panic at the prospect of the Fed raising rates more than they had expected. But that’s not the case anymore. Wages grew so slowly this month that they’re now only up 2.6 percent over the past year. And the fact that we’re still adding so many jobs means that there’s little reason to expect this to change anytime soon. In other words, there still seems to be some slack left in the labor market. Maybe the surest sign of that is that the percentage of 25- to 54-year-olds who should be in the prime of their working years who are in fact doing so hasn’t yet gotten back to where it was before the Great Recession.
It’s a reminder that patience is a virtue, especially for central bankers.