A Tight Labor Market
Kevin Drum notes that the 4 week average ratio of new unemployment insurance claims to employment is the lowest ever recorded
He wonders if it has anything to do with tighter standards for receiving unemployment insurance. I think it is just that the labor market is authentically tight. The Job vacancy rate is roughly tied for the highest on record (within 0.2%). The record only goes back to December 2000 but that was during the late 90s boom before the 2001 mini-recession.
Other indicators aren’t so strong — there are still a lot of long term unemployed and involuntary part time workers and hiring is not back up to the all time peak. Still I think the explanation is mainly just that the labor market is tight.
There are (at least) two ways to ask about the tightness of the labor market: (1) Is it tight enough? (2) Is it too tight? I think (2) is important and that (1) is a rhetorical way to keep the market loose. As far as I know, the only “bad” effect of a too-tight labor market is that wages may be bid up too fast. Thus, in my view, the only labor market tightness test we need is whether there is an unsafe or unreasonable amount of wage inflation occurring or obviously imminent. Under that test, at the present time (when there has been not the slightest sign of undue wage inflation), the answer should be that the labor market is not tight and there is no evidence it will be soon.
It would be nice to see some actual wage inflation for a change, even if it would lead to somewhat increased inflation for some time. The low inflation era has not been kind to workers. Perhaps, the fed should aim for 3 to 5 percent inflation? As long as real wages are going up, we’d just be going back to eras where the standard of living was rising much faster. I don’t agree with economists’ assessment that we are close to full employment and potential GDP.
Well, what is “wage inflation”? How do we know it isn’t already going on? The Fed can’t aim for any inflation. They do not control it(hint, it is heavily globally based factors besides US “tightness”). The government itself is a laggard here. They don’t show wage inflation to latter parts of the expansion and right into the bulk of the recession. They aren’t a good indicator.
I think we are close to full employment. Full employment is not when overall tightness creates mythical inflation numbers, but when the tightness creates pressures.
“Well, what is “wage inflation”?
The nominal wage rate minus any price deflator you might use. Wages are not rising.
Demand for workers cannot be high if their price has not been rising.
Isn’t it an illusion when considering the labor force participation?
Most will blame it on baby-boomers retiring which has “some” impact and not as great as many would claim. The last time I look PR for those in their sixties and higher is up and not down. It may have changed and I will have to look again.
I agree with Roger Chittum and Jacques Engelstein. I fear the post was poorly written. I don’t think the labor market is tight enough. I strongly support continued expansionary monetary policy (as in don’t even talk about raising interest rates). I also wish (without hope) for less contractionary fiscal policy.
Dan and Run, the job vacancy data tend to suggest that the low reported labor force participation really is low labor force participation not disguised unemployment. In spite of the vacancy data, I’d guess that it will take a while for the news of lots of vacant jobs to convince discouraged workers to search again. I am sure that I would be paralyzed by depression after 6 months of unemployment, but most people are made of stronger stuff than me.
The Rage, I think there are relatively decent data on wages. What they show is extremely steady and slow wage growth at very close to the inflation rate. This surprised people (including Krugman and I guess me) who expected actual wage declines given the extremely high unemployment. This pattern tends to suggest that lots of people are being paid wages which would have been cut if employers dared enrage workers by cutting dollar wages. This means that their wages won’t be increased for a while even with a tight labor market.
Again I mainly agree with Jacques — there is no sign that wage growth is or will soon be close to a the target = target price inflation plus productivity growth. I also think the price inflation target is too low.
I think it would be insane to raise interest rates before wage growth exceeds 2% plus a pessimistic guess about productivity growth. My view is that the labor market is tight and lets keep it that way until inflation reaches 4% or hell freezes over, whichever comes first.
One of the Feds (St. Louis or Chicago?) reported PR will go even lower and may be the norm. It even had different scenarios (same as SS) detailing each scenario. I do agree with both you and Jacques. Until we have wage-led-inflation as developed through wage growth (possible redundancy) and productivity (which appears to go to capital mostly), the prospect of Fed increases is mostly more punishment on Main Street.
If you watch PR closely (I assume yo do), you can see PR grow and shrink from month to month as people enter the Civilian Labor Force and then retreat. PR is lessening which I believe suggests more people are succeeding at something close to what it should be. Labor does want to work and they keep testing the market place for jobs. If they are not present, they retreat to whatever they are doing (part time work or otherwise). People coming out of manufacturing are paralyzed as to what the next steps are. No amount of education or training will fill this gap until the economy grows into it.
The overall view is less in Labor tax revenue which funds SS, Medicare, state and local coffers, etc. all of which are down and are evidence of fewer people working at higher wages. If a lower PR is to be the norm, Congress and State legislatures are not looking to alternatives.
it’s a basic point, but a tight labor market is a good thing. And if it really were a tight labor market, wages would be showing strong growth. Which they’re not.
I really cannot agree that we have a tight labor market. As others have pointed out, we have seen no “wage inflation”. Also, we have very low labor force participation.
I suspect that those “marginal workers” — the ones who pick up and lose jobs (applying for unemployment repeatedly) frequently — have been flushed out of the labor market entirely.
Phew, Waldmann made me nervous there for a minute