Weekend Economists: Spock Lives! March 6-8, 2015

[Demeter]

31. Jobs and the Federal Reserve

http://www.nytimes.com/2015/03/07/opinion/jobs-and-the-federal-reserve.html

The latest jobs report showed that unemployment fell to 5.5 percent in February and that 295,000 jobs were added to the economy. But the labor market is not as healthy as those figures might suggest. For example, the latest report shows that unemployment is still elevated for African-Americans, at 10.4 percent, and for Hispanics, at 6.6 percent, compared with 4.7 percent for white workers. In a truly strong job market, those racial gaps would be narrower because the competition for workers would drive joblessness down for minorities, who are the hardest hit in hard times.

Another sign of weakness is stagnant wage growth. In a stronger job market, competition for labor would push up wages as it pulled down unemployment. But wages have barely budged throughout the nearly six-year-old recovery. Ignoring these signs of weakness would be foolish, and yet the new report has stirred talk that the Federal Reserve will see the falling jobless rate as a sign of strength that justifies an imminent interest-rate increase. That would be a mistake, however, because raising rates in the near term would lock in high unemployment among minorities and wage stagnation.

The goal of monetary policy is to set rates low enough to foster job growth and high enough to control inflation. In the past, the Fed has indicated that an unemployment rate around 5.4 percent would be consistent with holding inflation to a target rate of 2 percent on average. Both the jobless rate and the inflation rate are getting closer to the benchmarks the Fed has set for initiating rate increases. But there are problems with those targets. The reason the Fed associates falling unemployment with rising inflation is that, theoretically, more hiring leads to higher wages that, in turn, lead to consumer demand for goods and services, pushing up prices. In practice, it has been several decades since those relationships have held — in part, because the Fed has usually been too quick to raise rates when wages have started to rise. This has led to a long-term decline in the share of income that goes to worker pay and a long-term increase in the share that goes to stockholders and executives.

The Fed should hold off until wages are growing in tandem with inflation and productivity. In the meantime, it should use its regulatory tools to ensure that low-interest-rate credit is put to productive uses and not speculative bubbles. Of course, Congress should do its part for job creation and economic growth — say, by financing infrastructure projects. Its inability to act is yet another reason the Fed has to get its response right.