People returning to labor force in droves — a key step for the economy

People returning to labor force in droves — a key step for the economy
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The latest jobs report released by the Bureau of Labor Statistics paints a decidedly positive picture of the U.S. labor market.

Nine years after the end of the Great Recession, the U.S. economy has achieved an unemployment rate comparable to the boom period of the late 1990s. Some 600,000 people rejoined the labor market last month, actively looking for work, a sign that jobs are indeed out there, and people are motivated to look for them.

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The jobs report suggests that the gradual improvement of labor market conditions continues. Labor market recovery did not start yesterday; it has been a sustained trend, building momentum especially in 2015 and 2016 and continuing in 2017 and 2018.

 

The recovery is broad-based, with employment growing in almost all sectors of the economy. Only retail trade, interestingly, showed notable job losses in June.

The most encouraging aspect of the June report was the increase in the labor force. The substantial drop in the proportion of Americans actually working was a major negative effect of the Great Recession.

The June report marks an important step forward, bringing the employment-population ratio, a key indicator of labor market health, closer to the pre-Great Recession level.

At the same time, the increase in the labor force confirms suspicions that we have not reached full employment yet. It has been difficult to gauge whether many of those not seeking work would be willing to look again or to accept jobs.

Long-term demographic trends have been lowering the employment-population ratio since 2000, but the Great Recession accelerated the downward movement. It now seems clear that a good chunk of the decrease actually represents people who can return to work.

This is good for these individuals’ financial position, for the total output of the economy and for the government (fewer people relying on government transfer payments).

Additionally, the increase in the labor force suggests an answer to a key puzzle of the recovery: the slow growth of wages. If there still are people out there who answer help wanted ads, employers do not feel so much pressure to raise wages just to keep their businesses producing at the desired level.

Still, many anecdotal reports suggest that companies in a variety of areas in the economy are finding it increasingly difficult to get the help they need.

While decreasing union power, deregulation under the Trump administration and significant court decisions against organized labor all may be limiting workers’ bargaining power, employers who just cannot get the people they need have to pay up.

It is now clear that employers have not been totally pushed to the wall due to the labor pool being larger than official data suggested, but the laws of economics have merely been postponed, not repealed. Expect wage increases to slowly start growing faster in the coming months.

Looking forward, at this stage in the recovery process, one would expect wages to rise faster, shortages of people with particular job skills in short supply to increase and rising costs. This would soon spill over into greater price increases.

The Fed would respond with increased interest rates, cooling off the overheated economy and eventually leading to a recession.

There are two unusual factors at play this time. First, Congress passed a fiscal stimulus near the peak of this business cycle. Fiscal stimulus packages are usually passed when the recession is at its worst, as with the Obama stimulus of 2009.

But this one was the result of an opportunity (Republican control of Congress and the White House) and an ideological craving. Be that as it may, the 2017 tax cut does seem to be having some effect on the economy, accelerating output and growth by modest amounts. This may postpone the inevitable recession.

Second, the administration’s increasingly active trade war is likely to cause increased prices, some unemployment as producers shut down U.S. plants and begin production in other countries to avoid tariffs and decreased investment as companies become less confident about their ability to understand and predict future developments.

Increased prices might increase the Fed’s worries about inflation, but the other two factors would decrease overheating fears by slowing employment and output growth.

I have not heard any suggestions from reputable economists that the trade war will have a major impact immediately. The amount of goods covered is just not a large enough part of the economy to make the whole economy stagger. But the path of the dispute is hard to predict.

The U.S. administration’s aims and goals are not easy to fathom. Retaliation will be swift and substantial; that much is clear. If the dispute continues to escalate, it will hurt all involved more and more. But the impact on U.S. GDP will probably be modest this year, too small to change the big picture of solid growth and a near full-employment labor market.

All in all, the jobs report brings news of a labor market finally substantially recovered from the Great Recession. It will not alter the Federal Reserve’s intention to raise interest rates and decrease bond holdings to remove the monetary policy stimulus that has been such an important aid to the recovery.

The strong jobs report does not mean that inequality has been dealt with, that policies to help displaced workers retrain and relocate if needed are adequate or that all workers can get a decent wage. But it does mean that things are pretty much back to the U.S. normal and that the Fed will continue tightening.

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.