Feb. 3 (Bloomberg) — Another Friday, another breakfast with Goldilocks.
You know the story. If today's unemployment number goes just a bit lower, officials will start to talk about how the economy is too hot, like the first bowl of porridge that Goldilocks tried. If unemployment moves up, the porridge is too cold. If the figures stay flat they will talk about how the economy is "just right."
But the real question is why we let the kid rule the table. Or let the analysis be dominated by a single number, unemployment.
This week I talked to two economists who reject the traditional theories behind the Goldilocks metaphor: that employment causes inflation and that it is the Fed's job to serve as chef, micromanaging growth. They're not alone. Most American businesses have long outgrown their faith in the employment-inflation link. It is time the rest of us stopped living in the fairy tale.
Economist Jim Glassman of JPMorgan Chase & Co. argues that getting out of the Goldilocks habit is easy — all you have to do is move your eyes over to another statistic on the labor page. He likes labor force participation, which measures the percentage of the population that is willing and able to work. These days — though things may shift this morning — labor force participation is fairly subdued at 66 percent. Glassman says he believes that means the economy has plenty of real growth ahead of it, no matter what the unemployment number does.
Correlated So Far
Consider the record. Back in the early 1980s, labor force participation was on the low side of the mid-sixties. Then it rose with employment. By July 1997, when unemployment was 4.9 percent, labor force participation had climbed to 67.2 percent. After the tech stock market boom collapsed, joblessness rose, and labor force participation fell. So far, so correlated.
But now comes the puzzler. The jobs have come back. The participation has not. Unemployment hit 4.9 percent last month, but labor force participation is still around the lows that prevailed back when the Bush administration was getting beaten about the head for a "jobless recovery."
Glassman says wages are relatively low for this point in the business cycle, especially the pay of lower earners, leaving room for raises and more hiring.
"The big story everyone is passing along is that the reason unemployment fell without inflation is that workers are too stupid not to demand all of the higher pay they should get for their new productivity," he says. "But that is itself stupid."
The Employment Cost Index supports his argument — especially when you exclude sales occupations, where large real estate commission income skews things. The ECI sees private wages growing 2.3 percent a year, a relatively slow rate. That 2.3 percent is nowhere near enough for the Goldilocks crowd to cry "too hot."
My own view is that the big increase in outlays for health insurance and benefits is keeping employers from hiring.
Like Glassman, Diana Furchtgott-Roth, director of the Center for Employment Policy at the Hudson Institute in Washington, also looks at labor force participation. She disagrees with him about the slackness.
The labor force participation number, she says, tells us more about long-term preference and sociology than about the economic recovery. The peak year for labor force participation for young men aged 16-24 was in 1950, an era when the end of high school meant the start of work.
Stay in School
Today, further schooling is an obvious choice for that age. And that is one reason why only 62 per cent of that group works today. Furchtgott-Roth notes that participation of younger women in the workforce in 2005 was down 5 percentage points from the late 1990s. "It's a sign of the strength of our economy that young women can afford make the choice to spend more time with family," she says.
On the other end of the age scale, labor force participation is up. One in three women aged 55 years and older works, a record rate. Older men also participate in the workforce more; their rate is up 5 percentage points in five years.
"The fact that this group finds jobs tells you that lack of employment opportunity is not what is keeping younger people out of work," says Furchtgott-Roth. Perhaps the senior employment is attributable to what we can call the Wal-Mart effect. Sam Walton's essential insight was seeing that people didn't merely want to spend time in a hardware store. Some also wanted to work in one.
But what's important is what Glassman and Furchtgott-Roth agree on. It is that now job creation is not about inflation. It is about productivity, or at least more so than the bond market thinks. They recall the 1990s, when some central bankers thought unemployment below 6 percent was wickedly inflationary. That proved an error. So did the same Goldilocks assumption in the 1970s. In fact, the 1970s decade produced unemployment and inflation at the same time that the country got a new word: stagflation.
One reason all these reality checks have failed to penetrate is that the financial markets and the Fed are locked in a highly unreal pattern: each acts as though it believes in Goldilocks because it thinks the other one does. But it's time for change and time to say good-bye to Goldy.
(Amity Shlaes is a Bloomberg News columnist. The opinions expressed are her own.)
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