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What the Strong Obama Jobs Recovery Tells 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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On Jan. 6, the Labor Department will release the final monthly employment report of what has been an historic eight-year run of jobs growth during the Barack Obama administration. This period confirmed some of our beliefs about the economy but also exposed the limitations of our understanding of a structurally changing employment situation.

QuickTake Monthly U.S. Jobs Report

Here are three main takeaways from this period, along with the implications for the short and longer term.

  1. The U.S. economy can lose lots of jobs very quickly. Fortunately, it also can re-establish itself as one of the very best global engines of job creation.

    As the financial crisis raged in early 2009, the first months of the Obama administration saw a dramatic loss in jobs, reaching a cumulative 8 million while the unemployment rate surged to more than 10 percent. The immediate cause was malfunctioning financial markets that undermined even the most basic business transactions, such as trade financing and suppliers' credits. And, with economic activity collapsing in the rest of the world, it served as a vivid reminder that today's sophisticated and hyper-connected economies are particularly vulnerable to "sudden stops" in global finance.

    After aggressive policy interventions helped to normalize financial markets both domestically and internationally, the precipitous loss of jobs gave way to a historic period of strong employment creation. Overall, the Bureau of Labor Statistics reports that more than 14 million jobs were added in this period when the U.S. restored its position as a global engine of growth, even though the challenges were greater than in earlier periods. In the process, the unemployment rate fell to under 5 percent, a level widely regarded as signaling "full employment."

  2. Not all aspects of the labor market are behaving "normally," and those that are not remain head-scratchers.

    Although lots of jobs were created in the impressive recovery from the dark days of the global financial crisis, other elements of the labor market did not respond as would be expected based on historical experience. Wage growth has remained rather anemic, even in the context of indicators of labor shortages. In addition, the labor participation rate, at 62.7 percent in November 2016, has failed to bounce back from multi-decade lows, while the employment-to-population rate seems stuck at a rather low level of 59.7 percent.

    Cyclical factors, including an unbalanced macroeconomic policy stance that has relied excessively and for too long on unconventional monetary measures and made insufficient use of fiscal policy, have played a role. Fortunately, this can be fixed if a better-functioning Congress enables a more comprehensive policy response that favors Main Street as much as, if not more than, Wall Street. But their restraining influences may pale in comparison to more structural and secular influences, such as demographics, globalization and technology. These more complex issues also contribute to two other economic puzzles, those of unusually sluggish productivity and bizarrely hesitant business investors.

  3. The above speaks to a larger and even more complex reality that is gradually imposing itself on the functioning of the labor market: the changing nature of work.
    We are starting only slowly to comprehend the extent to which the nature of work is in the process of changing, particularly as innovations enable new ways of doing things while outmoding others, sometimes quite abruptly. A particularly potent influence in this regard comes from the ever-changing influence of technological progress, artificial intelligence, big data and mobility. With only a partial analytical understanding of the dynamics of a changing labor market, and with political polarization limiting a timely policy evolution, the policy-making apparatus has struggled to keep up with realities on the ground. With that comes the risks of now succumbing to policy temptations (such as protectionism and suffocating regulation to shield the outmoded) that, while comfortably familiar, may end up denying reality rather than adapting to it and shaping it to deliver better social outcomes.

With these three factors comes quite a varied set of predictions for what lies ahead, starting with the jobs report for December.

In the short term, the U.S. is likely to continue to create jobs, have somewhat stronger wage gains and perhaps even experience a small uptick in the participation rate. This will all be part of the multi-month soft landing of the labor market in which monthly job creation averages around 150,000, annual wage growth is close to 3 percent and the employment-to-population rate edges up but very slowly. It is an environment that will validate the Federal Reserve's signal of three rate hikes in 2017 and, depending on the extent of policy rebalancing here and in Europe, place greater appreciation pressure on the dollar.

Over the longer term, the labor market will continue to evolve in a manner that favors skills at the high end, upends activities at the lower ends via an expansion of the sharing economy, and places even greater pressure on traditional mid- and low-skill activities. The extent to which this translates into further socio-economic dislocations and amplifies the politics of anger is far from predestined. Much will depend on the policy reaction.

A set of proactive policy responses such as strengthening skill acquisition, educational reform, and enlarging labor retooling programs already command a notable degree of analytical and political consensus, as do other enabling actions such as increased infrastructure spending, the removal of tax distortions, and enhancing the effectiveness of fiscal incentives. Some measures that are more defensive, such as hikes in the minimum wage, are also gaining traction. Then there is the significantly more controversial concept of universal basic income. Here, labor market upheavals would need to be far deeper and more disruptive for this seemingly simple (but actually complex and hard to effectively implement) measure to have reasonable probability of seeing the light of day.

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:
Mohamed A. El-Erian at melerian@bloomberg.net

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