What about higher wages?

Photographer: Saul Loeb/AFP/Getty Images

What the Jobs Data Will and Won't Tell Us

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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It has become increasingly difficult to reconcile different sets of data to form a coherent and decisive picture of the U.S. economy. Nowhere is this problem more evident and consequential than when comparing the contrasting developments in job creation (which has been robust) and the sluggish gross domestic product and wage growth. The jobs report for May that will be released Friday won’t clarify the whole picture, though it could provide some clues.

QuickTake Monthly U.S. Jobs Report

The best outcome for both the U.S. economy and the rest of the world would be another month of solid employment creation (200,000-plus new jobs), accompanied by a pick-up in wage growth (to above 2 percent on an annual basis).

This would indicate that the impressive job creation of the last couple of years is having a broader beneficial impact on the economy -- whether in terms of supporting future consumption or giving companies greater confidence to invest to expand capacity. It would only be a matter of time until GDP growth approached 3 percent; and the rising tide could help counter, albeit only partially, the rapid worsening of the inequality trifecta (of income, wealth and opportunity) that, in addition to creating social concerns, is increasingly recognized to be undermining current and future economic prosperity.

A less-good outcome would be for solid job creation to continue but, at the same time, for wages to fail to grow more meaningfully. This would suggest the economy continues to face a challenging set of domestic and external factors that -- importantly -- point to structural and secular headwinds.

Contributing factors would include deep-rooted forces that reflect the negative effects of technological innovation for workers, such as losing the race against machines and the dominance of supply globalization, which has brought lower paid labor and more efficient production chains in the rest of the world that put further downward pressure on earning prospects in the U.S.

In this scenario, job creation would tend to increasingly take on a barbell aspect: A few highly remunerative jobs would be accompanied by many more low-earning ones, and the middle of the employment-earnings distribution would continue to be hollowed out.

As a result, both household and corporate spending would be deprived of a sufficiently strong anchor. GDP growth would continue to disappoint. And the tendency toward even greater inequality would not be countered any time soon.

An even worse outcome would be if America’s job-creating machine sputtered and wage growth remained inadequate. This would reinforce the notion that the U.S. is stuck in a secular stagnation in which the economy not only operates consistently below its historical capacity but also experiences a reduction in its future capacity.

Under this scenario, sluggish GDP and wages would turn out to be the more accurate data readings when it comes to predictive content. The U.S. would be failing not just to fully unleash its considerable economic potential, but also would be unable to prevent a contraction of this potential in the future. And the beneficial longer-term impact of the encouraging decline in the unemployment rate of recent years would be offset by a labor participation rate that remained stuck at multidecade lows.

While Friday's data will provide come clues as to which of these three scenarios could play out in the months and years ahead, they will be far from decisive.

Nonetheless, policy makers shouldn't sit back and wait until the economic readings are both consistent and conclusive. Instead, they should be doing all they can now to increase the probability of a good outcome. That would include bolder steps toward meeting the nation’s infrastructure needs, clarifying their intentions for medium-term corporate tax reform, revamping the budgetary process and dealing with pockets of overindebtedness that have little chance of being resolved on their own.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor on this story:
Max Berley at mberley@bloomberg.net