Secret Job-Market Slack Complicates Fed Rate Decision: EconomyVictoria Stilwell
Federal Reserve policy makers are missing a key element as they assess the health of the labor market: data that includes whether those who are employed are overqualified for their job or would like to work more hours.
As a result, the “significant underutilization of labor resources” that Fed officials highlighted last month as they renewed a pledge to keep interest rates low for a “considerable period” is probably even more severe than currently estimated. And the information gap means policy makers may have more difficulty gauging the right moment to raise rates off zero.
“We have more slack than the official statistics suggest,” said Michelle Meyer, a senior U.S. economist at Bank of America Corp. in New York. “Because it’s difficult to measure underutilization, there’s still a lot of uncertainty as to how much slack remains, which means there’s uncertainty as to the appropriate stance of monetary policy.”
The Labor Department can put its finger on how many people are working part-time because full-time jobs aren’t available, or how many are so discouraged that they’re not even looking for employment. Other forms of underemployment -- for example the graduate with an English degree who’s working as a barista --are harder to pinpoint though just as important in trying to measure whether the labor market has improved.
The data shortfall sparked a discussion at a Peterson Institute for International Economics conference last month in Washington. Erica Groshen, commissioner of the Bureau of Labor Statistics, asked what additional data would be needed to help quantify labor-market slack.
Betsey Stevenson, a member of President Barack Obama’s Council of Economic Advisers, pointed out that while it was possible with current data to determine whether people working less than 35 hours a week are underutilized, those putting in a longer workweek fall off the radar.
The BLS considers anyone working at least 35 hours a week to be full-time. The Census Bureau, which surveys households to get the information needed for the Labor Department to crunch the monthly jobs data, doesn’t ask full-timers whether they’d prefer a different job or additional hours. As far as anyone knows, those workers are fully employed and content.
“If you’re a college graduate working at Starbucks and you work 32 hours, we know you’re in the wrong job,” Stevenson said at the conference. “If you work 35 hours, we don’t know.”
Private surveys have attempted to fill in the gaps. Some 46 percent of workers who graduated from college in 2012 or 2013 said that they were in a job that did not require their degree, according to a study released in May by Accenture Plc. That’s a five percentage point increase from last year, the New York-based management-consulting company’s report showed.
Meanwhile, a report earlier this year from the Federal Reserve Bank of New York found that 44 percent of working recent grads were underemployed in 2012, defined as holding a job that doesn’t usually require a bachelor’s degree at all. That was up from 34 percent in 2001 and approaching levels last seen during the 1990-91 recession, when concern about underemployment heightened, the central bank said.
Mario Mendoza said he works as many as 70 hours a week driving a taxicab in Miami. The 34-year-old has a bachelor’s degree in sociology and anthropology and a master’s in global sociocultural studies from Florida International University. He said finding an entry-level job where he could do social or market research would put his driving days behind him.
“I’ve applied for many of those jobs, I just haven’t been called up for the position,” Mendoza said. “If you spend so many years in school preparing yourself and studying, you want to use those skills to work, not to do something like be a waiter or drive a cab or work at Starbucks.”
The existence of workers like Mendoza suggests there’s even more room for labor-market improvement than official measures let on, further complicating the debate on when the Fed should start shifting away from its accommodative stance. Policy makers are already grappling with whether to delay any pullback in stimulus as a slowdown in global growth causes turmoil in financial markets and inflation decelerates with the plunge in commodity prices.
Payroll gains that are shaping up to be the strongest since 1999, combined with a jobless rate that fell to a six-year low of 5.9 percent in September, add to the confusing job-market signals. Joblessness is approaching the 5.2 percent to 5.5 percent range that Fed officials consider full employment even as the share of people unemployed for 27 weeks or more remains higher than at any point prior to the recession that began in December 2007.
Official figures on job satisfaction would go a long way toward helping solve for the mystery of slack, Meyer said. Such information could have implications for measures such as the number of people quitting their jobs and worker productivity, she said. While the Labor Department’s household survey offers much useful information, “it’s not comprehensive,” she said.
With the BLS’ budget tight, economists may be forced to make do with current data. Even if new survey questions were to be introduced, the lack of history means it would probably be of little use in the near-term, chief U.S. economist Michael Feroli at JPMorgan Chase & Co. in New York, said in an interview.
“I tend to think that maybe we do have enough measures,” Feroli said. “Arguably there could be a little bit of an improvement, but by and large we may actually have good measures of slack and just haven’t been using them well enough.”
An improving economy will, in time, help take up some of that slack, said David Blanchflower, a professor of economics at Dartmouth College in Hanover, New Hampshire.
“You have square pegs in round holes, but as the economy tightens, people can move where they want,” Blanchflower, who also joined the discussion at the Peterson Institute last month, said in an interview. “When you’re pretty close to full employment, that goes away.”
To the extent the labor market in the U.K. resembles the U.S., another sign of slack may exist in so-called full-time workers who want even more hours, said Blanchflower, a former member of the Bank of England’s Monetary Policy Committee.
The U.K.’s Labour Force Survey asks those who are not looking for a different or additional job whether they’d like to work longer hours at their current wage if given the chance.
In the U.K., 6.3 percent of full-time workers said they’d like more hours, Blanchflower and David Bell, an economics professor at the University of Stirling, found in a paper published last year. Another 19.7 percent of part-timers and 11.3 percent of the self-employed sought to expand their workweeks.
Employees willing to work longer for the same pay also explain why wages have been stagnant, Blanchflower said. Bosses know they can always extend the workweek for current staff without having to bid up salaries to lure more help.
At a press conference on Sept. 17 following a two-day meeting of the Federal Open Market Committee, Janet Yellen, the Fed’s chair, said the “very slow pace of wage increases does reflect slack in the labor market.” Average hourly earnings rose 2 percent last month from September 2013, compared with a 3.1 percent increase in the year ended December 2007, when the last recession began.
The types of work now being offered suggest wage gains will remain limited. Job openings at trades such as retailing and at leisure and hospitality companies, which pay less on average than other areas, have climbed almost 50 percent since the end of 2011, compared with an 18.6 percent gain for professional services that pay more, according to Labor Department data.
Rob Newton, 25 and living with his parents in Rhode Island, said he would happily exchange his full-time landscaping job for one where he can apply his degree in occupational health and safety from Keene State College in New Hampshire. As winter approaches, he’s staring down looming unemployment.
“I really don’t want to get to the point where I’m 28 or 29 and still not finding work,” Newton said. “I don’t want to be living in my parent’s basement for that much longer -- for their sake and for mine.”