As top central bankers gather this weekend for their annual powwow in Jackson Hole, Wyo., their main focus this year will be on the labor market — a topic at the heart of the Federal Reserve’s increasingly intense debate on when to start raising interest rates.
Fed Chairwoman Janet L. Yellen, who will be speaking Friday at the conference, has indicated for months that things aren’t as strong as the rapid drop in the jobless rate might suggest.
The unemployment figure has fallen to 6.2% in July from 7.3% a year earlier, but Yellen sees a lot of labor slack in the economy, which as she has put it, means there are “significantly more people willing and capable of filling a job than there are jobs for them to fill.”
But some of her colleagues on the Fed policy committee believe the labor market is much closer to full employment than Yellen and others think. With recent improvements in job growth and unemployment, they argue, the Fed should start to raise interest rates earlier than the expected target of next June to avoid the risk of a surge in inflation.
The intensifying debate was evident in the Fed’s last meeting three weeks ago.
Although officials made no policy changes, the minutes of that two-day meeting, released Wednesday, indicate that pressure is building inside the central bank as inflation, while still below the Fed’s 2% target, has ticked a little higher, and economic activity has rebounded after a winter stall.
"These minutes suggest that the committee as a whole has started to shift its stance and is pondering more seriously whether rates need to rise early next year rather than later," said Paul Dales, an economist at Capital Economics, who is now forecasting the first rate hike in March.
For now, Yellen and most Fed policymakers want to wait for further data on the economy, labor market and inflation before issuing any change in their forecast for when people might expect the first rate increase.
The minutes show that Fed officials, at the last meeting, were concerned about the weak housing market as well as potential spillover effects from the fighting in Ukraine and the Middle East.
The Fed’s employment and inflation outlooks hinge in large part on policymakers’ assessment of labor slack in the economy. Fed officials agree that as job growth has accelerated and more long-term unemployed workers have been hired, the number of willing and capable workers on the sidelines has declined. But the question is, by how much?
The unemployment rate of nearly 6% suggests the labor market is fairly tight — many economists said full employment may be about 5.5% — and employers are increasingly complaining about having trouble finding workers. All of which should give rise to bigger wage increases and, in turn, higher inflation.
But Yellen and other economists note that worker pay raises have changed little in this recovery; average hourly earnings are still growing about 2% annually — just a little bit above inflation.
In the past, lower unemployment led to higher wages. Based on historical data, given the drop in the unemployment rate from its peak of 10% in October 2009, inflation-adjusted earnings should have been 3.6 percentage points higher than they are now, according to a study by the Federal Reserve Bank of Chicago.
Daniel Aaronson, an economist at the Chicago Fed and author of the study, said that the biggest factor in the breakdown of this historical relationship between wages and joblessness appears to be the large number of part-time workers who have had their hours cut because of soft business or who otherwise could not find full-time work.
These part-timers numbered 7.5 million in July — down from a high of more than 9 million in 2009 and 2010 but still well above the 4.3 million before the recession.
"The involuntary part-time is quite elevated, and that has a big effect," Aaronson said.
By his estimates, the slack stands at about 1% of the current labor force. That translates to about 1.5 million people waiting in the wings on top of the regular flow of new entrants to the job market.
A large number of part-timers means companies, instead of raising pay to attract new hires, can just dip into the deep part-time pool.
But Fed officials and economists who don’t think there is that much slack noted that many people who dropped out of the labor force during the recession and slow recovery will never return. They are retired, on disability or no longer employable because of an erosion of skills and the stigma of being long-term unemployed.
With baby boomers aging and birth rates declining over the years, the unemployment rate is capturing an ever-tightening labor market, the experts said.
Employer reports also indicate that they are having increasing problems finding workers. In July, 42% of small business owners reported few or no qualified applicants for openings in the last three months, according to the National Federation of Independent Business.
Manpower Inc., the big temporary-help agency, said the hardest jobs to fill this year were in skilled trades, followed by restaurant and hotel staff.
But even with pockets of labor shortages in certain regions and industries — oil and gas, for example — experts said that on the whole, it didn’t appear to be so much a labor shortage as much as employers unwilling to pay more to fill openings.
"With all due respect to restaurants and hotels, I don’t think it’s a hugely coveted skill that very few people possess," said Jack Ablin, chief investment officer at BMO Private Bank in Chicago. "It’s got to be a matter of what they’re willing to pay."
At the same time, there are signs that wages are likely to grow faster in the coming months. The National Assn. for Business Economics said in July that 43% of its respondents’ firms raised wages in the last three months, more than double the percentage a year earlier.
If such increases are borne out in government statistics, that will give policymakers more reason to act sooner than later. Until then, or unless there are signs that inflation is heating up, Yellen and the Fed are likely to wait.