Labor Market De-Slacking

Fed Chair Janet Yellen is no slacker. She is a hard worker for sure. You’ll never see a photo of her at the golf course. She would like everyone who wants a job, and wants to work hard, to have the opportunity. She intends to keep interest rates near zero for as long as necessary to do the job. The economy seems to be moving faster toward Yellen’s goal of eliminating slack in the labor market. June’s JOLTS report and July’s NFIB survey of small business owners, which were both released yesterday, certainly confirm this assessment.

Of course, Fed Chair Janet Yellen has said that she won’t be completely satisfied with the progress in the labor market unless wages are rising at a faster pace. That’s not happening so far. During her March 19 press conference, she said:

The final thing I’d mention is wages, and wage growth has really been very low. …. In fact, with the productivity growth we have and 2 percent inflation, one would probably expect to see, on an ongoing basis, something between--perhaps 3 and 4 percent wage inflation would be normal. Wage inflation has been running at 2 percent. So not only is it depressed, signaling weakness in the labor market, but it is certainly not flashing.

Back in July, I suggested that Yellen should read a very interesting 7/21 article posted on Bloomberg titled, “Yellen Wage Gauges Blurred by Boomer-Millennial Shift.” The conclusion is that demographic shifts in the labor markets may keep a lid on wage inflation, which would make it a poor indicator of labor market conditions:

As today’s middle-aged Americans grow older, they are leaving their prime working years behind, trading big salaries for part-time gigs or retirement, just as an even larger group of young people come into the labor force at entry-level salaries. The seismic shift may be one reason behind the sub-par wage growth that Yellen says still shows ‘significant slack’ in the job market.

I concluded then, as I still believe:

If she continues to put too much weight on this demographically flawed indicator, monetary policy may stay too easy for too long (as it has already, in my opinion). What’s wrong with that if wage inflation remains subdued, and so does price inflation? Nothing really, I suppose, unless it all leads to lots more financial bubbles that should have been averted with the more immediate normalization of monetary policy.

(Based on an excerpt from YRI Morning Briefing)