In November 2016, the most recent jobs report had put America’s unemployment rate at 4.9 percent, and Jerome Powell believed it couldn’t fall much farther than that. “Today, we are reasonably close to achieving full employment and our 2 percent inflation objective,” the then-member (as opposed to chair) of the Federal Reserve Board of Governors said.
Powell was not alone. Months earlier, Harvard University’s Martin Feldstein warned that allowing unemployment to dip significantly lower would risk unacceptably high inflation. Janet Yellen suggested much the same in January 2017, when the rate was hovering around 4.7 percent.
Last month, the U.S. unemployment rate dropped to 3.6 percent — the lowest it’s been since December 1969 — and inflation is still undesirably low.
The latest jobs report is, thus, bad news for the economics profession’s reputation for foresight. But it’s quite good news for most everyone else. Employers expanded their payrolls by 263,000 in April, handily beating the consensus estimate of 190,000, and extending the longest streak of monthly job growth on record to 103 months.
That said, not every aspect of the report was pristine. Economists had expected to see 3.3 percent year-over-year wage growth in April, but that figure came in at 3.2 percent instead. Meanwhile, the decline in the unemployment rate was driven less by job gains than it was by working-age people dropping out of the labor force (the headline unemployment rate measures the percentage of people who are actively looking for a job but cannot find one, so when people give up and stop looking, the rate declines). In March, the percentage of working-age Americans who either had jobs or were looking for them sat at 63 percent; last month, it fell to 62.8 percent.
This metric, known as the labor-force participation rate, may be even more important than the unemployment number. As Ben Casselman notes in the New York Times, the most likely explanation for why below 4 percent unemployment has not produced the surge in wages and inflation that economists had expected is that the labor market was always much looser than it appeared. Even as the unemployment rate fell near historic lows, the participation rate remained well above the historical norm. Many experts insisted that this low participation rate was the new normal, a product of the population aging (or, perhaps, of high-quality video games). Which meant that simply allowing the labor market to tighten and wages to rise would not attract these workers off the sidelines; and thus, the U.S. economy could be at “full employment,” even if a historically high percentage of working-age people remained jobless.
This thesis has not held up.
“You look at those people who do not want a job, people who were out of the labor market due to disability, all of those people are coming back in,” said Adam Ozimek, an economist who has studied the issue.
Several years ago, Mr. Ozimek discovered that with a broader definition of unemployment — lacking a job, for any reason, while in one’s prime working years — wage growth had been in line with historical expectations throughout the recovery. That relationship has held up as the job market has improved. In other words, he argued, the wage-growth “mystery” wasn’t a mystery at all.
It shouldn’t be surprising then, that a decline in the participation rate coincided with slightly lower-than-expected wage growth.
Nevertheless, the overall report is far more positive than negative. Even the modesty of the wage growth has its upside — it suggests that our economy still has room to expand for quite some time before the Federal Reserve feels compelled to cool things off. The central bank has assumed a relatively dovish posture in recent months, abandoning the interest rate hikes that it had pursued last year. So long as wage growth remains steady, rather than suddenly spiking, the Fed appears content to hold its fire until inflation actually hits its 2 percent target, rather than trying to preempt such a price rise, out of fear that it may spiral out of control.
A few short months ago, a survey found roughly 50 percent of economists expected the U.S. economy to enter recession by the end of 2020. Now, most have shifted that timeline forward. Which is good news for the economy — perhaps a bit too good for our republic’s sake.