Will the Jobs Boom End Too Soon?
When Jack Schreiner needs more workers for his rubber-products factory in Nebraska, he frequently hires former prisoners. “I often think, There but for the grace of God go I. We’ve got a couple of folks who have been with us for some time and have been pretty darn good employees,” says Schreiner, president of Bruckman Rubber in Hastings. It’s not only charity that motivates him: Nebraska’s low unemployment rate, 2.9 percent in October, has driven him to take a serious look at applicants with blemished records. If not for that, he says, “I can’t say in all honesty that I would have been quite as open.”
As the labor market tightens across the country, employers are stepping up their hiring of people who often have a hard time landing jobs: ex-convicts, people with disabilities, African Americans, Hispanics, teenagers, and those without a high school education. Starbucks, for example, is leading a coalition of more than 30 companies facing talent shortages that have committed to giving jobs or apprenticeships to 100,000 “opportunity youth”—young people who are out of school and out of work. “When the items are flying off your shelves and you can’t keep up, you get a little more open-minded” about whom you hire, says Laurence Ball, a Johns Hopkins University economist.
Now the Federal Reserve is getting ready to raise interest rates, concerned the economy is on the verge of overheating. Higher interest rates would chill consumer spending and business investment. Some economists say the biggest losers could be people on the margins who got hired only recently or were just about to get a job. Last hired, first fired. “Every time we get to this point, the Fed says, ‘Oops, tight labor market,’ and they tighten up interest rates, and firms go back to their old ways,” says William Spriggs, chief economist of the AFL-CIO. “It really is discouraging.”
As Spriggs observes, we’ve been here before. In 1956 the German-born economist Henry Wallich split macroeconomists into two groups—“high-pressure” ones, who favor operating the economy hotter to create more jobs, and “low-pressure” ones, who want to run it cooler to keep inflation under control. In 1973, Arthur Okun, a former economic adviser to President John F. Kennedy, made the case for strong growth in a paper for the Brookings Institution called Upward Mobility in a High-pressure Economy.
Okun, who died in 1980, still has followers. “It’s OK to run what I would refer to as a high-pressure economy right now,” John Williams, president of the Federal Reserve Bank of San Francisco, told reporters on Oct. 1. Fed Chair Janet Yellen has also harked back to Okun’s concept. “Attracting discouraged workers back into the labor force may require a period of especially plentiful employment opportunities and strong hiring,” she wrote in remarks prepared for delivery at the University of Massachusetts on Sept. 24. “More speculatively,” she added, putting a lot more people to work could increase overall productive capacity, “thereby improving Americans’ standard of living.”
Yellen’s speech made an impression on Laurence Meyer, who served with her on the Board of Governors in the 1990s. He said high-pressure theory “goes against everything I taught at the university [Washington University in St. Louis] for 27 years.” But, he allowed, she might be onto something. If the Fed does manage to stimulate enough demand for labor to put a dent in the number of underemployed workers, he told Bloomberg in October, it “would be a fantastic achievement.”
Employers can be blinded by habit or discrimination. They fish in the small pool of their preferred job candidates rather than consider less-familiar applicants. The plight of black college graduates illustrates the problem. Even though college graduates in general are only half as likely to be unemployed as high school grads, in October black college grads were slightly more likely to be unemployed than white high school grads, according to Bureau of Labor Statistics data. In a test using fake résumés, conducted several years ago by sociologist Devah Pager, white men who reported having a criminal record had a better chance of getting called for a job interview than black men without a criminal record. Passing over perfectly qualified black applicants is “irrational” for employers, says the AFL-CIO’s Spriggs, who’s black, “but you need a period of low enough unemployment to clean up these disparities.”
The betting is still that the Federal Open Market Committee will raise interest rates at its Dec. 15 to 16 meeting and continue to nudge them higher sporadically thereafter. One reason is that Milton Friedman, the late, great conservative economist, continues to loom large at the Fed. In his presidential speech to the American Economic Association in 1968, Friedman said there’s no free lunch: Efforts to suppress the unemployment rate below what he called its natural level might work briefly but are destined to fail eventually, resulting in nothing over the long run but spiraling inflation. The Fed, Friedman said in the Space Age lingo of the 1960s, “will be like a space vehicle that has taken a fix on the wrong star.”
The ghost of Friedman lives on in a computer model the Fed’s staff consults in making economic projections. It builds in an assumption that very low unemployment will result in unacceptably high inflation. The latest version projects that all the extra labor and other resources in the economy will be used up by early next year, which, if true, implies upward pressure on wages and prices, says Michael Gapen, chief U.S. economist at Barclays. Actually, that’s starting to happen: Inflation-adjusted hourly compensation rose 3.4 percent in the third quarter from a year earlier, up from an annual average increase of only 0.3 percent in the previous nine years, according to data released on Dec. 2 by the Bureau of Labor Statistics.
The hawks on monetary policy are undeniably correct that workers don’t materialize from thin air just because the unemployment rate goes down. A lot of people who went into early retirement or on disability are never coming back, no matter how strong the demand for labor, says David Mericle, an economist at Goldman Sachs. Charles Plosser, who was president of the Federal Reserve Bank of Philadelphia before stepping down in March, told Bloomberg in September, “I know of no good economic theory” that says the central bank can do anything about boosting labor force participation or full-time work. The Fed “is setting up expectations it can’t meet. That could undermine its credibility,” he said.
Yellen has expressed mixed feelings about keeping a high flame under the economy. If the Fed waits too long to raise rates and then has to tighten abruptly to extinguish inflation, it “would risk disrupting financial markets and perhaps even inadvertently push the economy into recession,” she said in a speech in Washington on Dec. 2. That wouldn’t benefit anybody.
Yet as the great pivot toward fighting inflation begins, U.S. employment remains far from full. The jobless rate for blacks, 9.2 percent in October, was equal to the highest that the white unemployment rate got in 2009, when joblessness was still considered a national emergency. Chronic unemployment is deeply damaging, says Joseph Carbone, chief executive officer of WorkPlace, a nonprofit based in Bridgeport, Conn., that trains and places the long-term unemployed. “You get complacent, detached. You lose skills,” he says. “Depression and family difficulties develop. They militate against your being successful.”
Ultimately, how hot to run the U.S. economy comes down to a judgment about what’s important. The Fed’s decisions, while couched in the antiseptic language of monetary economics, are unavoidably bound up in hard questions about fairness, race, and inequality.
—With Craig Torres and Rich Miller