Nice job, pity about falling wages
It was the strongest U.S. employment report in three years and yet just beneath the surface was plenty of evidence that inflation pressure from the labor market is more of a fond hope than a real threat.
Nonagricultural payrolls rose in March by 162,000, the most in exactly three years and for only the third time since the recession began later that year. Of course, the United States probably needs about 200,000 new jobs a month just to bring unemployment down by a point in a year’s time. No sooner do jobs become available than sidelined would-be workers start seeking employment again. That kept the unemployment rate at 9.7 percent, while the key broader measure of the unemployed, the underemployed, the discouraged and the marginally attached — those game for work but unable to find it, get to it or find child-care while they go — hit a whopping 16.9 percent.
And that, ladies and gentlemen, is why, in an economic recovery with a growing job market, average hourly earnings actually fell by two cents an hour, or 0.1 percent from the month before.
“To see a contraction in wages in any given month is practically a 1-in-100 event and the last time it happened, in April 2003, Alan Greenspan and Ben Bernanke were busy building a ‘firebreak’ around deflation,” David Rosenberg, chief economist and strategist at Gluskin, Sheff wrote in a note to clients.
“In a nutshell, as one chapter of the labor market downturn is closed (employment contraction), another one starts (wage deflation). March’s employment data, on the surface, may well have met the challenge served up by the consensus of economists, but it fell well short of addressing the massive amount of excess slack that still exists in the labor market … So long as we have this much spare capacity in the labor market — with nearly one in every six unemployed Americans vying for every job opening — deflation pressures can be expected to build,” Rosenberg said.
The workweek expanded, so cash flow for those lucky enough to have a job was up, but outside of the kinds of prices set more in China than in Omaha — energy and raw materials — inflation does not seem to be a near-term threat.
There is clearly debate within the Federal Reserve about this. James Lockhart of the Atlanta Fed indicated last week he believes the structural rate of unemployment has risen. That implies he would be willing to start fighting inflation with higher interest rates while unemployment remains elevated.
Lockhart is absolutely correct that fewer people are migrating for jobs than they used to, almost certainly because so many cannot sell their houses. I’d say that argues for a lower home ownership rate and stopping encouraging people to pay underwater mortgages in order to keep their banks solvent.
While the number of people who have been unemployed for a long time continues to rise, there is an interesting cohort which only stays unemployed briefly. The percentage of people who have been unemployed for less than five weeks has stayed unusually low during this recession, lower than in any other similar period in the 20th century, according to Lakshman Achuthan of the Economic Cycle Research Institute.
This, he theorizes, may show stronger demand in certain parts of the economy where there is a shortage of hard-to-master skills. But while prospects may be good for people with high-tech skills, there is a large mass of workers in construction and manufacturing who may never see demand come back to pre-recession levels. They clearly are staying unemployed for longer periods, and when they return it is often at lower wages in totally unrelated fields.
For these people there is a huge challenge to regain marketable skills, while for the economy having a large army of the unemployed means that wages, at least for a large group, may now slide in a protracted way. Given that these people can vote, the pressure, political and otherwise, on the Fed to not raise rates this year will be intense.
The forces we are looking at are not new. During the past 15 years U.S. consumers squared the circle of stagnant real wages by taking on more debt in order to keep the ship afloat. More private debt is not going to happen, nor is another construction boom with good-paying lower-skilled jobs likely.
The Fed may respond to the threat of inflation, or to asymmetrical inflation in certain parts of the economy, with rate rises later this year, but it would be a brave play.