By Thomas Cooley and Peter Rupert
The problem with being an economist when at a party or other social event is that certain questions are bound to be asked: “When will these good times come to an end?” “Is a recession around the corner?” The answers: No one knows. Yes, the business cycle is a recurrent phenomenon, we just don’t know when it will happen. Obviously those answers do not give economists a very good name. Of course there are economists who have “predicted” a down turn…and yes, someone wins a lottery when the chances of doing so are millions to one.
The strong employment report from the BLS keeps the debate alive. Nonfarm payroll employment from the establishment survey increased 250,000 (246,00 in the private sector). August employment was revised up 69,000 and September down 16,000. All of the major categories showed positive growth.
Average weekly hours crept up to 34.5 from 34.4 and has been bouncing between the two for some time. 
Average earnings rose slightly. There has been substantial discussion over the issue of little or no growth in wages over the past many years. See, for example, NY Times, October 22, 2018, “Unemployment Looks Like 2000 Again. But Wage Growth Doesn’t.” The main puzzle many suggest is that the labor market is very strong in almost all dimensions except wage growth.
First, what do people mean by the labor market being strong? The labor market is creating more and more job opportunities as the BLS announced recently from the JOLTS: The number of job openings currently stands at 7.1 million, the highest number since the series began in December of 2000.
Of course the population and number of firms are also growing, so it is helpful to look at the job vacancy rate, that is, the number of vacancies at the establishment divided by employment at the establishment. The chart below shows that that also is now the highest since the series began, about 4.6 vacancies per 100 employees.
The number of unemployed persons has also fallen substantially, from over 15 million in 2009 to about 6 million today. Economists define a “tight” labor market as one in which job vacancies are high relative to those unemployed, i.e., vacancies divided by unemployment. Market tightness is also the highest it has been since 2000.
The impressive labor market performance can be seen across the main census regions, in each region there are more vacancies than unemployed searchers, that is, labor market tightness is greater than 1. This is the first time all of the regions have more vacancies than unemployed searchers.
The unemployment rate remained constant as the BLS reported from the household survey. The unemployment rate is now 3.73%, which is actually slightly higher than than the 3.68% in September. Note, however, that the number of persons unemployed actually increased by 111,000; but, so did the participation rate, from 62.7 to 62.9. Of course, as is well known, the participation rate is well below where it was 20 or so years ago, as is the employment to population ratio.
One concern about the labor force participation rate is what would happen if it increases to say 65.3%, somewhere around its average since 1980. According to the Atlanta Fed’s Job Calculator, the labor market would have to create about 630,000 jobs per month to keep the unemployment rate where it is today! Said differently, it the LFPR increases to 65.3% and we create about 200,000 jobs per month, the unemployment rate would get close to 7%.
On the issue of the slow wage growth, here is a picture of average hourly earnings for production and nonsupervisory workers:
Note that the above graph is in nominal terms. It would be foolish to say workers were much better off in the 1970’s because their wages were rising around 8% per year because inflation was increasing more than wages.
The next graph takes year over year wage growth and subtracts off year over year growth in inflation, as measured either by the CPI or PCE.
So, what do we make this graph? Until the mid-90’s real wage growth was often negative. The 90’s were good times and since then with such low inflation, workers have actually done pretty well.
The Big(ger) Picture
Currently there are small real wage gains for production and nonsupervisory workers. That is, with year over year nominal wage growth of roughly 3.2% in October…as long as inflation rises less than 3.2% workers are making real wage gains. Obviously, if inflation rises faster than wages, as in the 70’s and late 80’s, real wages will be falling.
Now, to Fed Chairman Powell’s claim that, “We’re a long way from neutral at this point, probably.” And then President Trump, blaming the Fed for the market selloff and describing the central bank as “crazy” and “out of control.” A long way from neutral, in this context, likely means the Fed will be raising the fed funds rate, but to be neutral, that is, keep inflation under control so as to not eat away the real wage gains of workers.
