Good things happen at full employment … really!
I’ve said it before and I’ll say it again: There’s nothing better for what ails us than full employment, meaning a tight, tight matchup between job seekers and jobs.
“Prove it!” you say?
Full employment and wage growth: Check out this Wall Street Journal article about Lincoln, Neb., where the unemployment rate is 2.3 percent. The piece tells of a local economy with a broad industrial portfolio — factories, retail, tech, education — generating strong labor demand.
And that, as I argued, puts significant upward pressure on wages, as seen in the remarkable figure from the article shown above. While U.S. wages putter along at 2 percent, with a little bump above that in the most recent data, wage growth in Lincoln is headed off the charts. That’s what happens when employers have to bid wages up to get and keep the workers they need. And it’s not just wages; the article tells of hiring bonuses and other non-wage benefits.
That wage trend does not look sustainable, and if markets work the way they should, people should be leaving places with much weaker demand and heading for Lincoln, which would stabilize that sharp, upward trend. In fact, one worker who did just that is quoted in the piece: “In Lincoln, you feel like you can make it.” Amen, brother.
Full employment and productivity growth: Turning to the broader U.S. economy, while many indicators are solid, especially compared with most other advanced economies, our persistently low productivity growth is of great concern. Dean Baker and I have long contended that at full employment, pressures from labor costs, as in the figure above, mean that firms either have to find new efficiencies, raise prices or start cutting into profit margins. Since they’d generally rather avoid the latter two, full employment can lead to higher productivity growth.
As I put it in this interesting piece by Peter Eavis in Thursday’s New York Times: “You want an economy and labor market where firms can’t afford to be inefficient.”
In that same article, Larry Summers notes one mechanism through which this occurs: “In a period of zero interest rates [corresponding to periods of weak demand] … it is very easy to roll over loans. And therefore there is very little pressure to restructure inefficient or even zombie enterprises.”
Okay, but can you find evidence in the data? That’s tricky, at least at the macro level, as productivity growth is a function of so many moving parts. You’d really have to get down to the firm level and see what types of investments and changes in practices firms undertake in tight versus slack labor markets.
However, one can ask one’s statistical software the following question: Does productivity growth predict slack or does slack predict productivity growth? And the answer for this so-called Granger causality test is the latter, not the former. That is, using trend productivity growth, you can reject the null hypothesis that slack (GAP in the table below) does not predict trend productivity growth. I know that’s a lot of negatives, but all it’s saying is that slack predicts productivity, in the sense of less slack correlates with faster productivity growth; productivity doesn’t predict slack.
That’s far too rough evidence to get excited about, but if there are any grad students out there looking for an awesomely cool thesis topic, searching for the existence of a full-employment-productivity-multiplier would make a great study. Like I said, it would surely involve case studies at the firm level. I’d start in Lincoln!
The Fed did what it felt it had to do Thursday in raising rates a touch. But given the fact that there are far too few Lincolns out there — the national labor market is not yet at full employment— benefits such as those just noted should militate an extremely careful, data-driven approach to the interest rate path.