Download The Notorious Employment Report,Knowing your

The Notorious Employment Report
Whatever one might say, you´re assured a good laugh from some of
the comments. For this report, this was my “elected” commentary:
The low unemployment rate could energize Fed officials—such
as Boston Fed President Eric Rosengren and Cleveland
chief Loretta Mester—who have been calling for higher rates
to keep the economy from growing too fast, possibly leading
to sharply rising inflation.
While payroll employment came in close to forecast, the
unemployment rate came in quite a bit below forecast, 4.6% in lieu
of 4.9%.
But that reflected another drop in the labor force participation,
both in headline and for the prime age – 25-54 – group.
Year on year wage growth (Average Hourly Earnings) for total
private sector employees unexpectedly dropped from 2.8% to 2.5%.
For the production and non-supervisory category, wage growth
remained pat at 2.4%.
The charts indicate how seriously defective is Rosengren´s and
Mester´s reasoning. By “capping” NGDP growth following the deep
2007-09 recession, the Fed has also “capped” wage growth. In the
past, monetary policy only tightened when wage growth was in the 4%
range. At present, with 2.5% wage growth some at the FOMC tremble!
Note also how NGDP growth has been falling for the past two years,
a clear sign that monetary policy has tightened.
I think it is interesting to compare two moments. The present
recovery with the one following the 1990/91 recession. Then, we
were living what John Taylor in 1998 called the “Long Boom”. Today
we are living what we have labelled the “Long Depression”. The
charts compare unemployment, labor force participation, wage growth
and inflation for the two 7 year periods (1992 – 1999 and 2009 –
2016).
What you come up with is:
1. Falling unemployment can be a fixture of both long booms and
long depressions
2. During long depressions, a less attractive labor market gives
way to falling participation
3. Wage growth is robust in long booms and lackluster in long
depressions
4. In either long booms and long depressions inflation can be
low/falling
If the Fed doesn´t realize the economy is “trapped” in a long
depression environment, the policy choices it makes, especially if
they are based on the behavior of the rate of unemployment, as
members like to emphasize, will be wrong and will hurt the economy.
Knowing your AHE from your AWE, via AWH – PI
better, PCE best
The October payrolls engendered the usual interest from inflation
hawks keen to find evidence to support monetary tightening. At the
end of the day it is the total nominal personal income growth
trends that matters and it is very weak.
The jobs data itself was not that interesting. The coming
hyperinflation was spotted in the modest growth in Average Hourly
Earnings (AHE) for All Employees as it soared YoY to a heady rate
of 2.8%.
Well, big deal. The more reliable, because much longer-term,
Production and Nonsupervisory Employees Average Hourly Earnings
growth rate showed no such increase and is firmly stuck around
2.5%.
We have commented on the difference between the two hourly earnings
figures in the past as the broader set of data includes the much
more volatile, often bonus-driven, earnings of senior staff. They
are around 18% of total employees but paid 80% more than the
average employee and 2.2x as much as the average Production and
Nonsupervisory employee. A good quarter on Wall St could, and
probably did, have an impact.
The more important figure is Average Weekly Earnings (AWE) as that
is what employees in fact earn. It is derived from multiplying
Average Hourly Earnings by Average Weekly Hours (AWH).
In the long run AWH moves in a secular fashion. It fell gradually
from 38 hours per week in 1965 to 34 hours by 1990 and has
relatively stable ever since. But AWH can plunge and sometimes
recover during recessions. Although the secular trend was down,
during that period it was recessions that generally permanently
drove down the number of hours worked per week.
Having your employees work less hours is a first line of defense
for many employers before they are forced by downwardly sticky AHE
to lay off labor.
Looking at the two longer run earnings series for Production and
Nonsupervisory Employees, we find they have approximately the same
mean (AHE=3%, AWE=2.9%), but AWE series is a little more volatile.
This is because of the wage stickiness seen in AHE and some
flexibility in AWH.
The difference between AHE and AWE is especially notable in
2008-10. The depth of the nominal spending fall is behind the
strong fall in hours (and so AWE). Zooming in and adding the
“driving force” (NGDP Growth):
Note how AWE (because of quick
together with nominal spending
constrain AHE adjustment. When
strongly because of adjustment
growth settles at a bland rate
adjustment in Hours worked) moves
(NGDP) growth, while wage stickiness
NGDP growth picks up AWE pick up
in hours worked. After that, NGDP
so that AWH stabilizes and AWE
growth comes down to “meet” AHE growth, with both remaining at
“depression levels”.
All that said, the whole concept of AWH and thus AHE is constantly
under threat due to the changing structure of the economy and the
shift to service sector and screen work. Total income and
expenditure are probably increasingly better guides to AD and NGDP
than the somewhat outdated AHE data and its two sisters AWH and
AWE.
Nominal Personal Income (PI) growth remains, like nominal Personal
Expenditure and NGDP growth itself, much lower, and in the case of
PI, more volatile than prior to 2008.