Fed Using The Wrong Rulebook
When the Federal Reserve started hiking interest rates to fight inflation two years ago, I worried.
My professor alarm flashed red; the tactic it seemed to be using—to create a recession to discipline workers—is flawed, costly and outdated.
Workers’ wages have lagged productivity for decades, as the Economic Policy Institute has faithfully reported. This is because employers have power to set wages. They aren’t the passive agents you learned about in baby economics class operating on a knife edge to keep prices at a minimum and forced to pay market wages. Employers protect profits by squeezing workers and squeezing consumers. Now consumers are feeling the price squeeze, but inflation is not workers’ fault. If the Fed thinks causing unemployment is the best way to solve inflation, it is operating with the wrong rule book.
So you can see why every first Friday of the month I get worried the Fed will think the economy is hot just because more workers aren’t afraid, more workers aren’t on the streets looking for a job, and wages have increased a little bit.
A Nice, Stable Labor Market
According to Friday’s latest round of the state of the labor market, the unemployment rate is only 3.5% and job growth was 236,000 positions. The growth in jobs is a slowdown from prior months but pretty much in line with labor supply growth.
The slowdown in employment is concentrated where you would expect—banking, finance, and tech—where headlines about layoffs recently dominated the news. People are flooding back to restaurants and hotels so employment is up in leisure and hospitality.
Wage growth is still strong but it has been coming down steadily. Lower-paid workers like those in leisure and hospitality continue to see gains, but the pace of raises has moderated significantly. Workers in leisure in hospitality are the least paid in our society, with average hourly earnings of $20.96 in March. But pay is up from last month by 16 cents or 6.1% from a year earlier. Retail is not far ahead of them with an average wage of $23.79, up just one cent from last month but 4.1% relative to March 2022.
It is good for society that our lowest-paid workers are getting wage increases, due in part to the fact that their quit rates are among the highest. McDonald’s and Hilton may be feeling a bit more loyalty to their workers as they threaten to leave, and higher pay helps to keep and attract workers.
Overall, however, workers have grown a bit worried. Quit rates are not increasing and the share of the unemployed that come from job leavers continued to fall this month to 14.2%, down from a high of 15.3% in January 2022 (this is from my personal favorite, Table A 11 in the Friday BLS report). Thursday’s labor report—the Job Openings and Labor Turnover Survey or JOLTS—backs up the view that workers are a little nervous. Average quit rates were unchanged at 2.6%, but notably workers in the rocky-road finance sector were less willing to “take their job and shove it”; their quit rates fell (see Table 4 in JOLTS.)
Quits did increase in the low-paid accommodation and food services sector, which helps explain the peppy wages at the very bottom.
Bottom line: The labor market is stable but not overheated.
The Fed Should Stay Put
Friday morning’s report showed a nice, stable, strong market for workers. It’s not too hot and not too cold. The Fed should not see anything here to goad it into continuing its interest rate hikes. There is no sign here that unemployment needs to be used as a disciplinary tool to scare workers into not asking for wage increases.
The Fed should slow down its interest rate hikes and not rely on outdated theories from the 1970s to fight inflation by causing a recession.
I see agreement from the finance sector. Ben Vaske, an investment strategist from Orion Portfolio Solutions, said Friday morning that, “while the unemployment rate is still at historic lows, this morning’s jobs report showed signs of cooling in the labor market … cooler labor growth could provide a basis for a rate hike pause.”
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