Production workers could still use a raise.

Photographer: Luke Sharrett / Bloomberg

Job Market to Fed: Proceed With Caution

Mark Whitehouse writes editorials on global economics and finance for Bloomberg View. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was previously the founding managing editor of Vedomosti, a Russian-language business daily.
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A healing job market is giving the U.S. Federal Reserve reason to pull back on economic stimulus by ending an unprecedented period of near-zero interest rates. The challenge will be to ensure that the move doesn't become the beginning of a larger mistake.

Friday's employment report offered further evidence that the U.S. economy is strong enough for the Fed to raise rates at its next policy-making meeting in mid-December. Nonfarm employers added an estimated 211,000 jobs in November, and the unemployment rate held steady at a seven-and-a-half year low of 5 percent. Average hourly earnings rose 0.2 percent from October, adding to an outsized gain the previous month. All this suggests that the U.S. may be nearing full employment, the point beyond which inflation tends to accelerate.

QuickTake Full Employment

The situation, though, is complicated. The Fed has a dual mandate: It must act to prevent the economy from overheating, but it must also do what it can to right a job market that, by some measures, has yet to fully recover from the 2008 recession. The unemployment rate, for example, doesn't count all the people who have stopped actively seeking work. If one instead considers the share of prime-age workers who have a job, the picture is less encouraging: As of November, the employment-to-population ratio for 25-to-54-year-olds stood at 77.4 percent, about 1.5 million jobs short of its 20-year average.

The shortfall in prime-age employment is much greater than it was at the beginning of previous Fed tightening cycles. Also, the rise in wages appears slanted toward management: Average hourly earnings for production and nonsupervisory employees increased at an annualized rate of 1.9 percent in the three months through November, less than the 2.4 percent gain for all employees. Here's a comparison of current labor market conditions to those that prevailed the last three times the central bank started raising rates: 

The danger is that by moving too far too fast, the Fed could unnecessarily leave millions of workers behind -- an outcome that could permanently stunt the economy's ability to grow. Although a 0.25-percentage point increase in mid-December would still leave the Fed's short-term target rate in stimulative territory, the central bank might not have much leeway beyond that. By some estimates, the "neutral" rate -- that is, the threshold above which the Fed would be hitting the brakes -- could be as low as 1 percent.

Fed Chair Janet Yellen has said that further rate increases are likely to be very gradual, as the central bank assesses progress in getting people off the sidelines and back to work. That sounds like the right approach.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net

To contact the editor responsible for this story:
Michael Newman at mnewman43@bloomberg.net