Why the jobs report data spell trouble for the Phillips curve

The U.S. economy added 215,000 jobs in July, and unemployment remained unchanged at 5.3 percent, the Bureau of Labor Statistics reported today. Over the past year, we’ve seen average gains of 246,000 jobs per month, and in the past three months, we’ve seen an average of 235,000 jobs per month. July’s report continued that trend.

There are other signs that the economy continues to move in the right direction, albeit slowly. The number of jobs added in May and June was revised upwards a total of 14,000 jobs, from 254,000 to 260,000 in May and from 223,000 to 231,000 in June.

July’s job gains occurred mainly in white collar services with healthy gains in retail trade, health care, professional and technical services, and financial activities, suggesting that perhaps more full-time jobs are being produced than part-time jobs.

And our Solman “U-7” Scale, which takes into account discouraged workers and the underemployed as well as the officially unemployed, dropped slightly from 12.73 percent to 12.63 percent.

Wages increased in July. Average hourly earnings increased by 5 cents to land at $24.99. Over the year, average hourly earnings have risen by 2.1 percent, but wages for most workers have barely kept up with inflation.”

“There’s no evidence anywhere — in average hourly earnings, or the employment cost index — of wage inflation. It’s low and it’s not rising,” says the Peterson Institute’s Justin Wolfers.

Biggest loser in these jobs data: The Phillips Curve. Unemployment has fallen dramatically over recent years yet wage inflation is unmoved.

— Justin Wolfers (@JustinWolfers) August 7, 2015

And that contradicts some long-held economic assumptions.

“Typically, when workers are hard to come by, employers pay higher wages to get them, which will in turn mean higher prices or inflation,” Justin Wolfers told PBS NewsHour, “This is the central organizing framework to think about how the economy works.”

But we aren’t seeing that today.

Something I never thought I would see in my lifetime: Interest rates at 0% when unemployment is at 5.3%. (Doesn’t mean it’s wrong.)

— Justin Wolfers (@JustinWolfers) August 7, 2015

So what’s going on? Wolfers “there is still slack in the market, and maybe workers are not hard to come by.” This would suggest that the economy has not yet improved to the degree we hoped it had.

So what does July’s job report mean for interest rates?

The left-leaning Economic Policy Institute sees slow wage growth as a reason for the Fed to hold off raising rates. “The arguably most important measure for the Fed — nominal average hourly earnings — rose only 2.1 percent over the year, in line with the same slow growth we’ve seen for the last six years,” writes the Economic Policy Institute’s Elise Gould.

The jobs report is clear evidence that the Fed should continue to hold the line, and let the economy recovery before raising rates.

— Elise Gould (@eliselgould) August 7, 2015

On the other hand, this month’s jobs report might just contain enough positive news to encourage the Fed to stay the course on its path toward raising rates later this year.