Analysis: What's Wrong Here? Unemployment Is below 4 Percent, but Wage Growth Is Still Lousy

Daily Herald (Arlington Heights, IL), May 13, 2018 | Go to article overview

Analysis: What's Wrong Here? Unemployment Is below 4 Percent, but Wage Growth Is Still Lousy


Byline: Matt O'Brien The Washington Post

The unemployment rate has dropped below 4 percent for the first time in 18 years, and the truth of the matter is we have no idea how much further it can go.

That's the silver lining for what is, if not a dark cloud, at least a surprisingly off-color one: Even though unemployment is a mere 3.9 percent, wages don't seem to be rising much faster than they have for the last couple years, and at nowhere near the rate they were before the crash. That's not what's supposed to happen when unemployment gets as low as it can ... which tells us that unemployment must not have bottomed out yet.

If this sounds familiar, well, that's because it is. We've been going through different versions of this for a few years now, as unemployment first hit a 10-, then a 16-, and finally an 18-year low. Each time, this was better than economists had thought was possible not long before; each time, wage pressure was still muted to the point of being almost completely quiescent; and each time, there weren't any signs that this was about to stop, as the economy was still chugging along at the same good-but-not-great pace it had been for most of the recovery.

The details, of course, have been different every month, but this big picture has not. In April, for example, the economy added a slightly worse-than-expected 164,000 jobs, but over the last three months it's still averaging a robust 208,000. Similarly, the labor force just shrank by a disappointing 236,000 -- the unemployment rate fell for this bad reason that fewer people were looking for work rather than finding it -- but, again, this is more than in line with what we thought would happen if you look at the last three months and see that it's up 412,000 over that time. And wages, as we already said, were up the same 2.6 percent that they have been for most of the last three years.

The simple story, then, is that the economy is adding somewhere between 150,000 and 200,000 jobs a month, just enough people are entering the workforce to offset all the baby boomers' retirements, and wage growth is stuck at a level that suggests the recovery still has a ways to go.

In other words, the natural rate of unemployment must be much, much lower than we thought.

That, you see, is the point at which unemployment has fallen so far that inflation starts rising. …

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