THE FED´S JOB MARKET EXPERIMENT / PROJECT SYNDICATE

The Fed’s Job Market Experiment

Absent inflation, the Federal Reserve will let the unemployment rate keep falling

By Justin Lahart


A job fair in Pittsburgh. Hiring was strong in April, with the Labor Department reporting that the economy added 263,000 jobs. Photo: Keith Srakocic/Associated Press


If it wasn’t apparent already, the April jobs report makes it plenty clear the Federal Reserve isn’t likely to cut rates anytime soon. But what would it take for the central bank to raise them?

Hiring was strong last month, with the Labor Department reporting that the economy added 263,000 jobs—more than the 190,000 economists expected. The unemployment rate, which is based on a separate survey, fell to 3.6%— its lowest level since 1969. But this came about because the share of the population participating in the labor force, and therefore included in the unemployment rate, slipped.

The implication is that, unless hiring slows sharply, the potential pool of workers employers can draw from won’t be able to grow fast enough to prevent the unemployment rate from falling further over the course of the year. And as employers compete for that shrinking pool of workers, wage growth ought to accelerate.

But, though wage growth has been increasing, so far it is hardly running hot. Average hourly earnings were up 3.2% in April from a year earlier, equal to March’s gain and short of the 3.3% economists expected.

Absent wages really picking up, Fed policy makers may decide they have little to worry about from the job market—particularly since they have signaled recently that they are focused on getting inflation higher, and that they would be comfortable with inflation for a time going through the 2% target they have set for it.

Moreover, even if wage growth does pick up, that doesn’t mean higher inflation will be a fait accompli. Companies would first have to raise prices in an attempt to pass their higher compensation costs on to consumers, which is no easy thing in a competitive marketplace. And then consumers would have to accept those higher prices.

Until then, the Fed may leave rates on hold even as the unemployment rate continues to decline and workers become increasingly scarce. It is hard to know what to expect when the unemployment rate gets driven down so low, but we may be on the way to finding out.