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00:00Why do you think there's further room to run on the labor market . Well we look at a prime age workers in particular. We're well below the peak that we had right before the Great Recession . We've seen a lot of primaries workers from out of the workforce . And if we break them down by category we can look at a lot of them went to the disabled category and some analysts had thought that maybe they would stay there they wouldn't be able to come out. But in the last sort of six or eight months we've seen the disabled category sort of drop and it looks like they are coming back in. And so we it like we maybe be to move primate workers back at least up to where they were before before the Great Recession. And I actually think that the peak that we had in the 90s which is even bigger than what we had right before the recession is possible if we were willing to run the economy hot enough. Connor what do you make of the argument that because prime age labor force participation is still pretty depressed that there is potentially quite a bit of slack still out there . I think there's certainly some potential for additional supply if wages rise a certain amount and the way I would sort of make an analogy here is if you look back at the oil sector in the mid 2000s we were talking about peak oil and worrying about running out of oil and then the price of oil went high enough to find . So sort of find new supply. And I think that's what we're trying to do right now and we sort of look at sort of wage growth by industry and by company to see that if when we see those companies that see significant wage growth if they are able to pull people back in. Carl there there's a lot of anecdotal evidence that things are getting tight. You go through the conference calls CEOs complain about it. They talk about higher wages. You look at the various surveys like the NFIB survey people say availability of labor is one of their hardest challenges. Why isn't this to you compelling that maybe we really are running out of available workers. So I think that we're running out of workers that are sort of easy to hire workers that you know are typical. What we saw especially I mean the analogy I like to make a lot is in the 90s when labor force participation sort of hit its peak and it was hard for companies to find workers. I mean it was a very profitable time . You know sales were high. So I don't think that necessarily a tight labor market it is bad for profits but it was difficult . What happened is that made companies go and look for non-traditional workers. You know they were more aggressive in their advertising recruiting. We see that they are more willing to take disabled workers are willing to take minorities but willing to take people who are coming off of welfare. I see a strong link between the number of people who came off of welfare or analogy between number he became off for welfare in the 90s and potentially people coming off a disability now both of those are populations of people who were disaffected disconnected from the workforce perhaps thought that you know they weren't ever going to be had to find a job again. But when the market is tight enough they'll be pulled back in. And so that's going to be difficult for employers. I mean they're gonna have to work for. But if they do that the economy will be rewarded with a larger labor force and more overall production counters and even if you think that the labor market is tight or getting much tighter. Would you. What about the idea that the Fed should just wait that wage growth really isn't that hot and there really should be no urgency until it's really wage growth is really screaming . I think the question and really the big argument here is sort of the risks of both approaches. And so Karl points out that you know using some measures like participation employment population that there may still be significant supply the alternative is that for whatever reason whether it's education disability people staying at home to take care of their kids that we really are getting close and that sort of as we get to a very low level of unemployment we could see wage growth and inflation pick up in a non-linear way and that would force the Fed potentially to hike much faster than people think. And that could sort of create a recession rather than the sort of gradual hiking approach which sort of hopefully can keep things out on a more even keel and extend the cycle. Carl what should the Fed do. Yeah so I mean I think they should definitely wait and see take a gradual approach no matter what we've seen is that the inflation has been below target for like five or six years now . It's only Peter. I think once peace has only peaked about 2 percent once maybe twice since the Great Recession ended and then only for a few months. What the Fed is telling us what Jay Powell reiterates is that 2 percent is a symmetric target which means that we should be above it as much as we're below it. But we've only been below it since the Great Recession and that to me that is a that that shows that we've had two weak monetary policy that we haven't been submitted enough that the Fed has given the market the impression that it's going to cut off the spigot anytime inflation even approaches 2 percent. And so as it does you know markets pull back but I think the Fed should make it clear that this is symmetric target we're going to let it go above if we have to. Powell said in his testimony the only way that we're going to know how many people we can draw back into the labor force is to try is to get out to see how many people come back. If we run the economy I think that's a good intuition. I think that he's probably not as hawkish as people think. I hope that I see that in some his testimony . And I think that they should stay with us with a wait and see approach. Conner I'll give you the last word. Let's see if the Fed were to wait until they really see ise inflation gathering and we saw wages pick up in a non-linear way. Who gets hurt the most in that scenario. I would say it's really corporations we're just with profit margins where they are with earnings expectations where they are with stock sort of priced relative to treasuries which interest rates are still pretty low. So if you've sort of see this dynamic of inflation picks up profit margins go ahead as wages and costs rise interest rates rise which makes stocks less attractive. It's really much going to hurt corporations much more hard than it will workers in this cycle .

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Debate Heats Up Over the U.S. Labor Market and Pay Raises

Niskanen Center Director of Economic Research Karl Smith and Conor Sen, a Bloomberg View columnist, discuss whether the economy is hot enough to generate pay raises on "What'd You Miss?" (Source: Bloomberg)

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