Will Goldman’s Blankfein Depart by the End of the Year?: DealBook Briefing

Will Goldman’s Blankfein Depart by the End of the Year?: DealBook Briefing

When will wage growth pick up?

It’s the unknown that torments investors every time the jobs report comes out.

Maybe we can shed some light.

As Friday’s jobs report showed, the economy is adding large a numbers of jobs without stoking the sort of surge in wages that makes investors worried about inflation. Investors favor these economic conditions because it reduces the chances that the Federal Reserve will have to raise interest rates more quickly than they expect.

But how long might wage growth remain moderate? Much depends on how much slack exists in the jobs market. The headline unemployment rate, at 4.1 percent, suggests there is very little.

But the unemployment rate does not count the people who aren’t in the workforce – and who may now enter it. No one knows for sure how many of these people are really looking for a job at any one time, or might do so in the near future. But if there are a lot of them, companies will not struggle to find workers — and wage growth might remain tame. Conversely, if the number of prospective workers on the sideline is small, wage pressures could soon build up.

One way to get an idea of the size of this group of people is to look at the employment rate, which measures people with jobs as a percentage of the population (over 16 years old and excluding prisoners.) At 60.4 percent in February, that rate is still well below the level it was at before the 2008 financial crisis. That would imply that there are still a lot of people who could enter the jobs market.

But our colleague Ben Casselman, who covers economics, has devised an adjusted employment rate that readers might find interesting.

How did you adjust the measurement of the employment rate – and why did you make your tweaks?

Let me start with the “why?” The employment rate is great in that it avoids all the issues that bedevil the unemployment rate in terms of deciding who should “count” as unemployed. But the problem is that it’s too broad. It includes a huge group of people who no one would expect to work, namely retirees. And that group is growing rapidly because baby boomers are aging. So if we want the employment rate to tell us anything meaningful about the state of the economy, we have to account for that big demographic trend in some way.

One easy way to do this is to look at the employment rate among so-called “prime-age” workers, those ages 25 to 54. That excludes both retirees and most college students, which means it filters out a lot of the demographic noise in the employment rate. The problem is, it filters out a lot of valuable information, too. Lots of 55-year-olds work! And indeed, 55-year-olds are much more likely to work now than they were a generation ago.

My calculation, which borrows from an approach used by economists (and occasional Upshot contributor) Ernie Tedeschi, adjusts for demographic shifts by controlling for age and sex. It essentially asks, “What would the employment rate look like today if the U.S. population still had the same demographic profile as it did before the recession?”

What does your adjusted employment rate tell us about the jobs market right now?

By my calculation, the demographics-adjusted employment rate was at 62.8 percent in February, which is almost exactly where it stood in December 2007, which was the first month of the recession. But it’s still significantly below where we were in 2000, the last time the unemployment rate got this low.

Can we use your adjusted employment rate to get an idea of how much slack is left in the labor force?

Yes, but it doesn’t give a definitive answer. What it tells us is that the employment rate has fully recovered from the recession. It doesn’t necessarily mean that all the slack is gone.

Let me expand on that slightly. Between the peak of the dot-com bubble in 2000 and the peak of the housing bubble in 2007, the age-adjusted employment rate fell by about a percentage point. There are two reads on that. One is that the job market just never got as good in the mid-2000s as it did in 1999 and 2000. The other interpretation is that there has been a fundamental shift in the economy, and for some set of reasons — technology, globalization, video games — the share of Americans who are willing or able to work has fallen.

If you buy that second story, then the fact that the age-adjusted employment rate is back to prerecession levels should tell you that we’re basically at full-employment today. The slack is gone. This is as good as it gets. But I would argue the last couple years should lead to significant skepticism about this kind of structural-change thesis. The labor force has grown dramatically over the last few years. Job growth has continued unabated. Unemployment rates for marginalized groups such as black Americans have fallen sharply. And this has all happened in an environment where wage growth has been sluggish, which suggests that employers are able to attract workers without boosting pay, at least by much. All of that suggests that there are still people out there who are willing to work if opportunities become available. I don’t know if we can get back to that 2000 employment level, but today’s report suggests we can at least keep moving in that direction.

Economists and analysts react to the jobs report.

James Ingram, MB Capital: “February’s fall in average wage rise data takes some of the pressure off. But the creation of more than 300,000 jobs in February suggests it will return in the months to come. Throw in a potential trade war between the US and the EU and the US economy could be headed for a perfect inflationary storm later this year. An interest rate hike in March from the US Fed must now be all but nailed on.

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