The last year has been one of strong, and sometimes confounding, economic news. Nowhere is that more apparent than in the unemployment picture released by the Bureau of Labor Statistics Friday morning.
December’s report ends 2014 with a bang. Payrolls grew by a higher-than-expected 252,000, and the previous two months’ job gains were revised upwards by a collective 50,000. The unemployment rate fell to 5.6 percent — a post-Great Recession low.
Making Sen$e’s own more inclusive metric for assessing America’s unemployment scenario, what we call the “Solman Scale U7,” declined again, to 13.43 percent, the lowest since we began calculating it in 2011.
An average of 246,000 jobs were created each month in 2014. Contrast that with 2013, when the economy only added an average of 194,000 jobs per month. This has been the best year of job growth since 1999.
And yet, we know from multiple surveys, not to mention the midterm elections, that American workers aren’t rejoicing. Of particular concern for middle class pocketbooks, average hourly earnings actually fell in December by 0.2 percent. Remember last month when we celebrated job growth and wage gains? Some of us hoped that an average hourly gain of 9 cents signaled we were turning a corner. Dean Baker, director of the Center for Economic and Policy Research, wasn’t convinced. And he was right. December’s decline reverses November’s gains.
But wage declines affect the lucky — at least they have jobs. December’s report suggests that a smaller proportion of us is actually working. The labor force participation rate fell to 62.7 percent in December, while the employment to population ratio remained at 59.2 for the third straight month. The Solman Scale tabulates the expanded pool of people looking for work, and according to that figure, nearly 22 million Americans say they want a full-time job but can’t find one.
The population grew by about 180,000 last month, as is typically the case. And even if all of those people got jobs — 155,000 more Americans reported being employed (according to the survey of households) — many more workers left the labor force. Nearly half a million, in fact.
That means that either they stopped looking for a job — BLS calls them “discouraged workers” — or they retired. Economists believe it’s some of both. About half, Georgetown’s Harry Holzer told us last fall, tend to be baby boomers whose departure from the labor force is to be expected. But the rest — call it a third to a half — tend to be prime-age workers who should be finding jobs but aren’t. In December, we know that 100,000 people said they wanted a job, consistent with November, and about 420,000 fewer Americans reported being unemployed. So it’s possible that more of December’s labor force departures represented retirees.
The big policy question that stems from such a mixed jobs report is, what will the Federal Reserve do? The central bank is charged with a dual mandate to maximize employment and keep inflation at 2 percent. It has already ended its bond buying program after seeing improvements in the labor market. But interest rates remain at rock bottom. And lest you dismiss this debate as merely central bank banter, these are the same short-term interest rate that affect anyone with a loan, or anyone wanting one.
Throughout the past year, the Fed’s Open Market Committee has indicated it would be necessary to keep rates near zero even after ending quantitative easing and seeing improvements in the labor market. But how long is too long? Central banks “hawks” — those who are worried about inflation — are squawking about raising rates to keep prices in check.
But December’s report would seem to be a victory for central bank “doves” — those who prefer keeping rates low. (Don’t miss the Financial Times’ video essay on how those avian terms came to be. Subscription required.)
But here's the big news. Remember all those hawks pointing to wage inflation? THEY WERE WRONG WRONG WRONG.
— Justin Wolfers (@JustinWolfers) January 9, 2015
Inflation is still well below the Fed’s target. And wages, which are expected to rise when the labor market tightens, aren’t. Having risen 1.7 percent over the year, they’re barely keeping pace with inflation.
Agreed. MT @JustinWolfers: Just how far can we push the economy without igniting inflationary concerns? My bet: A fair bit further.
— Michael R. Strain (@MichaelRStrain) January 9, 2015
At last month’s press conference, chair Janet Yellen suggested the Fed would entertain raising rates in “a couple” of months. Paul Solman recently got another perspective — not from a dove or hawk — but from someone we’ll call a quail. John Williams holds Yellen’s old job as president of the San Francisco Federal Reserve, which means he now gets a vote on whether and when those rate should go up. Catch their conversation on the NewsHour Friday night.