By Dan Steinbock
The US experienced strong job growth in June when the economy created 222,000 net new jobs, exceeding analyst expectations. At the Federal Reserve, the jobs report boosted confidence that the US economy is on track for new rate hikes in the fall. Since the unemployment rate now stands at barely 4.4%, the Fed expects that it can cope with the further tightening. Yet, the solid performance may not guarantee that everything is in place for sustained job growth.
A temporary taste of success
In June, some jobs were fueled by temporary drivers. The June gain of 35,000 jobs in the state and local governments was preceded by a loss of 8,000 jobs in the sector in May. Other June gains reflect school districts’ new hires for the fall. Moreover, the retail sector added over 8,000 net new jobs, but only after losing almost 80,000 jobs between February and May, due to the ongoing shift to online retailing. Much of the job growth was a result of hiring in healthcare, social assistance, and local governments, which are tackling America’s ageing and ailing population. Usually, when unemployment is low, employers tend to increase wages to attract new workers and keep the existing ones. Presently, that’s not the case. In fact, some of the biggest job gains are taking place in lower-wage sectors such as healthcare and temporary workers, which keeps the wage growth down.
Structural constraints along the way
The US recovery is suffering from structural constraints as well. The unemployment rate is lowest among whites (3.8%) and Asians (3.6%), higher among Hispanics (4.8%), twice as high for blacks (7.1%), and far higher for youths (13.3%). Moreover, the labour force participation rate—the number of people who are employed or actively looking for work—peaked at 67% in the early 2000s. Currently, it is less than 63%, which it used to be in the mid-1970s. However, the employment-population ratio is not as affected by seasonal variations or short-term fluctuations. In the US, it was almost 75% in the early 2000s. Now, it is barely 60% as fewer young Americans are looking for work and the baby boomer generation is retiring.
The end of the Phillips curve?
The current Fed believes in the so-called Phillips curve, a historically inverse relationship between the rates of unemployment and the corresponding rates of inflation. In this view, decreased unemployment rate goes hand in hand with higher rates of inflation. Consequently, as the US unemployment rate is now only 4.4%, that should correlate with a progressively rising inflation. Yet, the reality seems to be precisely the reverse.
Until early 2017, the unemployment rate did steadily decrease, while the hourly earnings climbed close to 2.9%. But in the past few months, it has remained around 4.4%, whereas hourly earnings have decreased to 2.4%. Historically, a short-run trade-off between unemployment and inflation reflected the post-war Keynesian era when the rates climbed from 2% in the 1950s to a peak of 20% in the early 1980s. In the past three decades, the rates have shrunk to zero. Although job growth is no longer accompanied by wage growth, Chair of the Federal Reserve Janet Yellen continues to rely on the Phillips curve to guide monetary policy.
Policy under a new lens
Instead of new hikes in the fall, the Fed needs to reconsideration its strategy. If the theory associated with the current policy path is untenable, it cannot provide appropriate guidance. In fact, new data is likely to indicate soft inflation and lingering wage growth. As a result, spring 2018 may witness not just the removal of the Phillips curve from its prominent seat at the Fed, but also the replacement of Yellen and Fischer at the top.
A rethinking of policy will also be vital in regard to international growth. A single-minded focus on rate hikes that would possibly result in much collateral damage to emerging markets is dangerous when those emerging economies account for most of the global growth prospects.
Dan Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA), and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore).
The original version was published by Shanghai Daily on July 17, 2017.
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