Next week, Federal Reserve officials publish new quarterly forecasts,
and all eyes are going to be on where they set the job market's
Goldilocks rate.That's the estimated unemployment level officials
figure is neither too high nor so low that it starts to drive wages and
prices higher. To quote Goldilocks, it's "just right."
Fed
officials in March estimated this "natural rate" of unemployment at 5
percent to 5.2 percent. Unemployment stood at 5.5 percent in May. A new
paper by Fed board staff shakes up this view by suggesting the number
could be as low as 4.3 percent.
That
has implications for next week's Fed policy meeting. If Fed Board
economists Andrew Figura and David Ratner are right, the labor market
has room to run. So there may be no need to raise interest rates soon,
or fast.
Figura and Ratner look at the question of where the full employment rate might be through the lens of labor compensation.
One
standout feature of the recovery is that labor's share of the money
made from production and imports is still moving sideways around the
lowest levels in records dating to 1947.
If
the reason for that is weak bargaining power, then firms can add more
jobs and drive down the unemployment rate without much wage pressure. In
fact, if the share of cash going to labor versus capital isn't changing
much, it's an incentive for firms to post job vacancies as demand
rises.
If a firm sees that hiring one more worker adds another
$10 in sales, and the share between labor and owners stays relatively
unchanged at $4 for the firm and $6 for workers, then "I am going to
want to post more vacancies and add more people," said Michael Gapen,
chief U.S. economist at Barclays in New York.
At least two things give the research weight. First, it tells a story that fits well with current data.
Average
hourly earnings for production and non-supervisory workers have
averaged 2.1 percent growth since this expansion began in June 2009, a
percentage point below the last expansion.
Inflation, minus food and energy, remains low at 1.2 percent by the Fed's preferred measure.
Job vacancies rose the most in April in data going back to December 2000.
Second, Fed Governor Lael Brainard cited the research in a June 2 speech where
she made the case that "there are reasons to think that the natural
rate may have declined over the past few years such that a gap remains
between the unemployment rate and its natural rate."
Even if Fed officials do raise the benchmark lending rate in September, as about half the economists in a Bloomberg News survey this month expect, the research suggests the pace of tightening will be slow.
"It
could mean that one percentage point of tightening per year is too
steep in a world where" the rate of full employment is 4.25 percent,
Gapen said.
