Labor market blues
By Scott Sumner
Here’s Free Exchange:
The unemployment rate as expected fell to just 5.4%, much less than economists predicted a year ago.
Last July I said:
I believe the unemployment rate (6.1%) is the most informative. There is still some slack, but far less than in 2009. Unemployment has been falling at a very steady 0.1% per month for a year and a half. That will continue. Meanwhile, productivity numbers are horrible and likely to stay that way. As I’ve been saying, get used to 3% NGDP growth as the new normal, 1.2% real and 1.8% deflator. That means lower than normal interest rates as far as the eye can see.
Free Exchange continues:
Yet America’s economy is far from full strength. At the end of last year many had thought that 2015 was going to be a good year for the labour market, thanks to lower oil prices. So far it has not turned out like that (see chart).
Last November I said:
[F]alling oil prices have no implications for global growth—it merely redistributes global wealth.
That’s why estimates of US RGDP growth next year at $66/barrel are not much different from what people were estimating at $100/barrel. Global oil output hasn’t changed very much.
Might falling oil prices affect AD? Not with monetary offset–the Fed will simply adjust the date at which they start raising rates.
So not all of us expected faster growth from falling oil prices. Free Exchange continues:
Despite rock-bottom interest rates, in the first quarter GDP grew by a measly 0.2%, at an annualised rate. Surprisingly, cheaper oil has not stimulated consumer spending. Instead, bad weather and Americans’ worries about sluggish wage growth are probably responsible for the bad news.
The writer seems to suggest that lower interest rates are usually associated with faster growth. Just the opposite is true. And there’s not much evidence that bad weather explains the first quarter, as that explanation would imply faster catch-up growth in Q2. But most pundits expect another weak quarter.
What about “worries about sluggish wage growth”?
Although the number of people who want to work full-time but can only find part-time jobs (the so-called “part-time for economic reasons” or “PTER”) has fallen, it remains much higher than before the recession hit. . . .
According to a paper from Federal Reserve Bank of Chicago, the PTER rate is a very important determinant of wage levels. It finds that a 1% increase in the rate is associated with a 0.4% fall in real wage growth. Due to this form of underemployment still be comparatively widespread, wage growth is slowing. Average hourly earnings, for instance, increased by only 0.1% in April. Do not expect fatter paycheques–for which the Federal Reserve is watching closely–until some of the labour-market slack disappears.
I think this reverses causality. It’s not that weaker labor markets lead to lower real wages, rather it’s above equilibrium real wages that lead to weak labor markets. When wages are above equilibrium, the real wage rate rises more slowly, as wages move back to equilibrium.