Employers are showing workers the money — finally
If something is inevitable, it usually does happen. That would be my reaction to recent reports that wages are finally starting to grow faster in the U.S.
Normally, when the economy really gets going, companies have to scramble to hire enough workers, or to hire the exact skills that they need. As an economic expansion peaks, some companies will even resort to poaching workers from rivals, or to offering substantial rewards such as signing bonuses or guaranteed overtime.
The real story in the recovery from the Great Recession of 2007-09 was simply that this normal pattern just was not happening. Although unemployment rates came down, wages hardly moved. Even when wages started growing in 2013-14, wage growth seemed to get stuck in the 2.0-2.5-percent range, after accounting for inflation.
Economists understood the source of the confusion. The unemployment rate is really the result of two different factors: how many people have jobs and how many people are actually looking for jobs. During the recovery, the unemployment rate fell in part because more people got jobs, but also in part because many people simply stopped looking.
While common sense might call someone who is out of work but has not been on a job interview in six months unemployed, economists do not. To them, that person is out of the labor force.
Hence the confusion: It has been very difficult to gauge how many of those who are counted as out of the labor force actually would be willing and able to come back. The Bureau of Labor Statistics compiles a whole range of data series on employment, unemployment and the labor force, but even these numbers have not spoken clearly.
There are three things going on that are hard to separate. One is demographic: Baby boomers, the largest generation, are moving into retirement. By itself, this demographic pattern should decrease the proportion of the population that is in the labor force.
Second, some people may have given up because they feel that their skills are no longer needed. Some of these workers may also have left the workforce because of medical conditions, mental and physical, or opioid addiction. There is strong evidence that the opioid epidemic is a factor in the decreasing labor force, but not the main factor.
Third, some people may have given up for the moment but would be ready to come back. It is now apparent that there were quite a few of these people. If people start going on interviews again because they hear that jobs are now more available, we can even see the unemployment rate rising at the same time that more jobs are being created.
With this as a backdrop, what do the reports of higher wages tell us? The main message is that enough of that third category of workers, the ones who left the labor force but are willing and able to come back, have come back. That reservoir is mostly dry, and employers are having to really wave some cash around to get the workers they want.
That is very good news for American workers. For the Federal Reserve, these reports confirm that the time to stop stimulating the economy is here. The Fed has been raising the federal funds rate, the interest rate it influences, slowly but steadily. It will now pick up the pace.
The Fed has also started to let its stockpile of bonds decrease. This should increase long-term interest rates like the ones on home mortgage rates.
Between the two kinds of interest rate increases, loans will become more expensive. The expansion should slow down a bit. In the immediate future, there is little reason to expect that the expansion will stall out completely. But the Fed will be increasingly sensitive to signs of increasing inflation, based on this information about wages growing.
There is one major remaining puzzle: inflation itself. Usually, when wages start to rise strongly, inflation rises. That has not happened yet. The Fed’s actions show clearly that the central bank considers greater inflation another inevitability.
The Fed also has a watchful eye on possible excesses in other parts of the economy. Often, periods of very low interest rates lead to unsustainable booms in asset prices. The biggest cause for concern right now is probably the stock market, which continues to reach new records.
Contrary to popular opinion, the level of stock market prices is not a good indication of the health of the economy. But still, the Fed worries about what would happen if stock prices fell sharply.
There are other corners of the financial markets that look frothy as well, such as the cryptocurrency markets in general and bitcoin in particular. Again, these are probably neither large enough nor deeply connected enough to the rest of the economy to change the Fed’s broad assessment.
The important question is not whether there will be eventual pain, but how widespread the pain will be. At this point, the number of bitcoin owners who might be affected by a bursting of that bubble is far fewer than the number of homeowners whose wealth was deeply affected by the downturn in house prices after 2006.
In short, some of the fog about what is happening on the labor market has lifted. Rising wages are finally here, and they probably will be here for a while. The Fed will react, taking the punch bowl away just when the party is getting good.
Any significant surprise, whether it be stronger jobs and wage growth or a burst of inflation, could lead the Fed to react even more forcefully. But for now, the party is getting good, and the Fed is playing its role as Grinch, per usual.
Evan Kraft specializes in the economics of transition, monetary policy and banking issues as a professor at American University. He served as director of the research department and adviser to the governor of the Croatian National Bank.
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