We hear constantly that unemployment in the U.S. is at all-time lows, but the official picture is far from telling the whole story. We spoke with David Blanchflower, a British-American labor economist and professor at Dartmouth, about his new book “Not Working, Where Have All the Good Jobs Gone?” to dig down and find out what’s really going on in the labor market.
Flawed Understanding of Unemployment
The raw employment data leaves something to be desired. What Blanchflower has found is that, to quote Gallup Research regarding one of its most important discoveries since its founding in 1935, is that, “What the whole world wants is a good job.”
This is what he examines in his new book. Basically, a good job provides 30 or more hours a week of work, a regular paycheck, and security, Blanchflower noted.
This stands in contrast to what we have today, he added. The current recovery is essentially jobless, but even for those who have jobs, many of their positions are insecure and low paid.
Employment rates today in 2019 are around 2.5 percentage points below what they were at the start of the Great Recession in January of 2008, Blanchflower stated.
“That amounts to something like 7 million additional workers just to get the employment rate back to its level pre-recession,” Blanchflower said. “And there were higher levels before that. So the unemployment rate doesn't pick that up. It's no longer an adequate measure of what happens in the labor market. Under-employment is a big deal. … Essentially, people around the world in the United States, in the UK, Canada and elsewhere are hurting.”
Stimulus Response Inadequate
The Keynesian stimulus in 2008 and 2009 caused economies to recover, Blanchflower noted, but it didn’t do enough to repair employment because the Fed and others are relying on flawed models. Essentially, fear of inflation led policymakers around the world to backtrack, particularly by imposing austerity and pulling back on stimulus.
This made it inevitable and obvious that we would see a slow, jobless recovery, Blachflower said, which is what he expected at the time and what we’ve seen play out. Employment levels are not back above where they were before the recession, and wage growth has been weak, as well.
Essentially, it boils down to the fact that there aren't enough jobs available and people want more jobs. Inadequate demand in the economy is what’s keeping wage growth relatively benign.
Full employment looks different than what we see today. Instead of tightness in the labor market and firms poaching workers from one another, we see the opposite. Competition for labor is what drives wages up, Blanchflower stated. Instead, we have a large pool of labor and now, in the last few months, slowing wage growth.
“In the most recent release, we're seeing weekly wages of production and non-supervisory workers falling back to about 2.5 percent, which suggests the U.S. economy is a long way from full employment,” Blanchflower said. “That's a big deal because the Fed made an error in 2015 and 2016 by raising rates, saying that we were close to full employment when we weren't, and now we're living with the consequences of that error.”
Inflation Is No longer the Story
Essentially, the Fed guided its decisions based on the idea that if the unemployment rate reached 4.5 percent, we would see wages take off. Their models also told them that inflation would head higher at that point. It’s important to remember that these are the same people who missed the Great Recession, Blanchflower noted.
Instead of seeing wage growth accelerate, driving inflation, it has remained stagnant and now appears to be falling slightly. The mistake the Fed made was not looking at the real world, and instead relied on its models, Blanchflower stated, and in the process decided to remove stimulus too quickly.
The Fed raised interest rates nine times from end of 2015 based on bad data. Now, the Fed is having to completely reverse course and cut rates, even though as recently as December 2018, they were saying markets should expect four rate increases coming in 2019 and four more coming in 2020.
“Now we're seeing cuts coming, and the market is expecting over the next six months three or four more cuts to come,” Blanchflower said. “This is a very big indictment of the Fed and on the credibility of the Fed. Markets don't believe them because of all the errors they made. … Even in places where employment has recovered, wages have been disappointing. Everywhere, it looks like this is about as good as it gets. Stand ready, because this looks like it may be going to get worse again. And the worry is that I have little confidence that policymakers know what to do.”
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