Yellen Confronts Tale of Two Job Markets in Deciding Rate Moves

U.S. Employment
Employees assemble Taser smart weapon cartridges at the Taser International Inc. manufacturing facility in Scottsdale, Arizona. U.S. employers added 230,000 workers to payrolls in April after a 126,000 gain the prior month that was the smallest in more than a year, according to the median forecast of economists surveyed by Bloomberg before the report on May 8. Photographer: Patrick T. Fallon/Bloomberg

Federal Reserve Chair Janet Yellen and her colleagues have to decide who’s got the right take on the job market: economists crunching data on Wall Street or staffing agency executives dealing with employers on Main Street.

Pointing to building wage pressures, some economists argue the U.S. economy has returned to full employment, with little or no slack left in the labor market. Staffing specialists, meanwhile, say the situation on the ground is more complicated. They echo some of Yellen’s arguments that the improving jobs outlook will draw more people into the market and keep wages from rising too fast.

Who’s correct is of crucial concern for policy makers because they have tied their decisions on the timing of their first rate rise since 2006 and the pace of the increases thereafter to the tautness of the labor market.

“The whole question of how close we are to full employment is probably the most critical issue facing the Federal Reserve right now,” said Nariman Behravesh, chief economist in Lexington, Massachusetts, for IHS Inc.

If the number crunchers on Wall Street have it right, the Fed runs the risk of sparking unwanted inflation the longer it waits and the slower it goes. If instead staffing specialists are seeing the situation correctly, the central bank can afford to hold back.

Fed Meeting

Yellen and her colleagues meet Tuesday and Wednesday to plot monetary strategy and update their economic forecasts, including their estimate of what constitutes maximum employment at stable prices.

The call isn’t an easy one because the improvement in the labor market isn’t uniform. The overall rise in wages is being driven in part by competition for job candidates with specialized skills such as mobile application developers. Meanwhile, the recession has left millions who have outmoded job skills, or none at all, stuck in part-time work or out of the labor force altogether. If interest rates rise too fast, that could slow down the economy and close off job opportunities for these people.

Two Markets

“Out here on Main Street, what we see is really a tale of two markets,” said Bob Funk, chief executive officer of Express Employment Professionals in Oklahoma City, Oklahoma. “We’re having a hard time recruiting skilled and semi-skilled workers in some markets, while in other markets, where there are a lot of unskilled people, we just don’t have the jobs” for them.

Economists surveyed by Bloomberg see virtually no chance the Federal Open Market Committee will change policy this week. The central bank has kept its interest-rate target at zero to 0.25 percent since December 2008.

When they last issued a forecast in March, most policy makers lowered their estimate of the jobless rate that represents full employment to a range of 5 percent to 5.2 percent from a 5.2 percent to 5.5 percent range in December. A new paper by Fed economists Andrew Figura and David Ratner suggests the number could even be as low as 4.3 percent.

Michael Feroli, a former Fed researcher who’s now chief U.S. economist at JPMorgan Chase & Co. in New York, voiced doubt that policy makers will reduce the estimate further this week, given the recent acceleration in worker compensation.

Wages for private-sector employees rose 2.8 percent in the 12 months through March, the biggest gain in more than six years, according to the employment cost index published by the Labor Department.

Natural Rate

Full employment, also known as the non-accelerating inflation rate of unemployment or Nairu, is roughly synonymous with the natural rate of unemployment: the joblessness that exists even in a healthy economy, as industries evolve, creating some jobs and wiping out others.

When the economy is at full employment, companies find that they have to offer higher pay to attract or retain workers. That boosts costs and pushes businesses to raise prices to make up the difference, increasing inflation.

Yellen has suggested that policy makers will allow joblessness to fall below the natural rate to help lift inflation to the central bank’s 2 percent target.

The fact that salaries are picking up with unemployment at 5.5 percent suggests the Fed has miscalculated and the U.S. has already breached Nairu, said Drew Matus, deputy chief U.S. economist for UBS Securities LLC in New York. He puts the natural rate at 6 percent or above.

Rate Increases

The Fed is “far behind the curve,” said Matus. He sees the central bank raising its benchmark rate twice this year, then boosting it to 2 percent to 2.25 percent by the end of 2016, and “the risk is they’ll end up moving even faster.”

A growing number of job openings also suggests that the labor market is tighter than policy makers perceive, according to Torsten Slok, chief international economist at Deutsche Bank AG in New York.

The number of private-industry positions waiting to be filled jumped to 4.89 million in April, the most in government data back to December 2000, from 4.63 million in March. Job openings exceeded hires in April for the first time on record.

“The skills that are needed by employers are not exactly the skills that the unemployed have,” said Slok. He puts Nairu at about 5.5 percent, in line with last month’s jobless rate.

There certainly is “a war for talent” among employers for workers with certain skills, said Paul McDonald, a senior executive director at Robert Half International Inc., a Menlo Park, California-based staffing firm. That’s led in some instances to compensation increases of 10 percent to 20 percent.

Specialist Market

But the demand for workers is “not across the board. It’s still a specialist market,” he said.

Wages are rising for more talented workers, said Funk. But they’re “creeping up” not galloping higher. And the gains probably won’t prove inflationary until they become widespread.

Salaries at the lower end of the skill spectrum continue to be held down by competition from overseas, including China, he said.

Also restraining wage growth, according to Michael Durney, chief executive officer of New York-based staffing company DHI Group Inc.: The large numbers of people working part time who want full-time employment or are stuck in jobs for which they’re over-qualified.

Economic Reasons

Yellen has drawn attention to the part-time workers in maintaining that there’s still slack left in the labor market. Some 6.7 million Americans were working part-time for economic reasons in May, well above the 5.5 million average since 1995.

The Fed chair also has argued that some of the people who have dropped out of the labor force in recent years can be enticed back in as the job market improves.

Jeffrey Joerres, executive chairman of Milwaukee-based ManpowerGroup Inc., seconded that notion. “There are a lot of people on the bench waiting to see if it’s appealing enough to come back into the market,” he said. “That has to do with what kind of job they want and how much they want to get paid.”

With wages starting to inch up, “it does feel as though we’re right at an inflection point” in the labor market, according to Joerres. But he doesn’t see that as start of a surge in salaries as companies remain wary of the outlook.

“Employers can get scared away pretty quickly if they don’t continue to see an open path” to better growth, Joerres said. “From a Fed perspective, there is no rush about having to worry about catching up with inflation.”

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