January 21, 2015
Robert Samuelson used his column on Monday to debate the need for the Fed to clamp down on wage growth and came down on the right side: hurry up and wait. This is good to see, but there are a few more data points that make the case even more strongly.
First, the quit rate — the share of unemployment due to people voluntarily quitting their jobs — is still at levels that we would expect in a recession. This is important because it is a relatively direct measure of workers’ confidence in their labor market prospects. If they are unhappy at their job, but they don’t feel they have much opportunity to find a better one, they will be reluctant to quit unless they have a new job lined up.
Percentage of Unemployment Due to Job Leavers
Source: Bureau of Labor Statistics.
The second noteworthy point is the high number of people who report working part-time involuntarily. We can debate the reasons that prime age workers might have dropped out of the labor force, but there is no plausible case that people who work part-time jobs and say they want full-time employment, don’t actually want full-time employment. This number is still up by more than 2 million (@ 50 percent) from pre-recession levels, suggesting a large amount of labor market slack.
The last point is that we really don’t have much basis for fear about getting this wrong by being too lax. According to research from the Congressional Budget Office, the terms of the trade-off between unemployment and inflation have flattened. This research indicates that even if the unemployment rate was a full percentage point below the NAIRU for a full year, the inflation rate would only rise by 0.3 percentage points.
The NAIRU or non-accelerating inflation rate of unemployment, is supposed to be the lowest unemployment rate we can hit without having the inflation rate start to rise. We don’t know exactly where it is, but most economists put it between 5.2 percent and 5.5 percent unemployment. (I think we can go far lower.) But the point is that if the “true” number is 5.5 percent, and we allowed the unemployment rate to fall to 4.5 percent for a full year, the inflation rate would only be 0.3 percentage points higher than at the end of the year than the beginning. In the current environment, that would mean going from a 1.6 percent core inflation rate to a 1.9 percent core inflation rate.
That doesn’t sound like a really bad story. For this reason, it’s hard to see why anyone should be talking about raising interest rates and deliberately slowing the economy right now.
Note: Link fixed.
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