Part IV: Staying the Course:
Even if growth exceeds the Fed’s low expectations in 2019 and 2020, the FOMC does not expect measured unemployment to decline or wages to accelerate significantly. The reason is that further job gains will translate into increased labour force participation among discouraged workers, especially younger persons, who are disenchanted with part-time jobs at low pay and with little upside. Labour force participation of youth has declined from about 55% in the 1990s to 35% today. That precipitous drop is less surprising given that young persons, who fill about half of the 2.6 million jobs that pay at or less than the federal minimum wage, can be paid much less than the minimum. Moreover, at $7.25 per hour the federal minimum wage now is about 30% of the average wage of all production and nonsupervisory workers in the US, which is the lowest ratio since the law was passed in the late 1940s. The ‘normal’ range for this ratio is 40% to 50% of the average wage. In an effort to attract workers, 29 states already have set their minimum wage standards above the federal level and six others are slated to do so this year.
Although wage inflation may get a slight boost from legislated changes in minimum wages this year, continued hiring belatedly will attract some discouraged workers, and measured unemployment will level off or even increase slightly. Those potential workers who have dropped out of the labour force for whatever reason find job search more promising as opportunities become more plentiful. I and William Wascher, a colleague at the Federal Reserve, found that aggregate labour force participation, tended to increase when a broad measure of job opportunities - total employment relative to the working age population (E/P), finally reached its previous cyclical peak. In today’s context, we would have to adjust that concept to account for the aging of the population as the baby-boom generation began to retire in the 2000s. Our ‘persistence’ model would predict the aggregate labour participation rate would increase once the adjusted E/P approached about 60%, which it did in 2016, and finally surpassed that level in early-2017.
Right on cue, the overall participation rate began to recover, albeit slowly, averaging 62.8% in 2017 and early 2018 and rising to 63.2% by February 2019. Teenagers, adult women and persons with only high-school diplomas apparently are finding it easier to find jobs in a ‘hot’ job market and are looking for work more often. The greatest increase in participation, however, has come from older workers with prior work experience. In short, the US workforce still has room to expand.
The implication for monetary policy is that a tight labour market is not likely to overcome the structural forces that are keeping inflation at bay. The Fed’s review of its inflation target should conclude that the FOMC will need more patience with the current neutral stance rather than a new target.
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