Hired After 27 Years Behind Bars Shows Fed's Tough Choice

(Bloomberg) -- Michael Zito got a job in July, and that game-changing development likely owes a lot to a tight U.S. labor market.

The 57-year-old New Yorker spent 27 years in prison after killing an acquaintance who he says broke into his Brooklyn apartment and beat his wife. When he was released on Dec. 12, 2016, he had never used a mobile phone. He had no home, no living relatives, and no computer skills. Yet eight months later, he landed work in building maintenance.

“I have a low-paying job, but I have a paycheck, which I’m happy for,” said Zito, who makes $11 an hour keeping antique elevators running at a 1920s building in Queens. With the money, he hopes to move out of a shelter soon. Plus, he says, “it gives me a little bit of extra job experience.”

People like Zito pose a conundrum for the Federal Reserve in 2018, as Jerome Powell takes over as chairman. A strong labor market is making jobs readily available, even for those with tarnished employment records. It’s a human argument to move extra-slowly with rate hikes, which officials will continue debating as they meet to discuss policy this week.

But Powell and his colleagues also want to guard against a run-up in inflation and financial stability risks. If either got out of control, forcing them into more aggressive tightening, it could leave folks who have a tenuous hold on the labor market in even worse shape. Given that tradeoff, Powell’s Fed is likely to tread a middle course, lifting borrowing costs patiently.

Still Raising

“There’s no sense of an overheating economy or a particularly tight labor market,” Powell said during Senate testimony last month, noting that wage gains have yet to take off. Still, he said, “the best way to sustain the recovery, I believe, is to continue on this path of gradual interest rate increases.” If confirmed by the Senate, the nominee will replace current Chair Janet Yellen when her term ends Feb. 3.

The policy-setting Federal Open Market Committee is widely expected to raise rates when it concludes a two-day meeting on Wednesday. Officials in September penciled in three hikes in 2018 and are expected to retain that forecast when they release fresh projections this week.

Hiking runs the risk of leaving people behind.

Goldman Sachs Group Inc. economists say America’s labor market is operating at two speeds. On one hand, employed workers who change jobs do so quickly -- at 4.1 percent last month, headline unemployment is tight. On the other, people sidelined by the recession for structural reasons -- from felony raps to outdated skills -- are only slowly trickling back in.

Job-finding prospects for the non-employed have gotten better and “could improve further in a labor market as tight as in 1999-2000,” they wrote in a research note this fall. That may boost the labor-force participation rate by a few more tenths of a percentage point.

“For the Fed, the implications of this divided labor market are double-edged,” the Goldman economists wrote. If the low short-term unemployment rate matters more for inflation, as they suspect, letting the job market run creates the risk of overheating. “The FOMC seems to find this trade-off unappealing and is likely to continue to tighten steadily as a result.”

Healing Effect

Stanley Richards has witnessed the healing properties of low unemployment. As executive vice president of the Fortune Society, the nonprofit that helped Zito get a job, he’s seen companies become more willing to hire his clients as the shadow of the 2007-2009 recession fades.

Construction had been a really hard sector to place people, Richards said, but “because there are so many opportunities in that industry now, we have been able to partner with companies who are hiring our people."

To be sure, the Fed isn’t playing a zero-sum game. Cautious tightening shouldn’t trigger a hiring or growth slump -- it will just slow progress. Economists reckon that rates are still low enough to boost growth, despite recent increases.

The central bank also isn’t turning a blind eye to the fact that the job market is absorbing latent slack.

Lowering Projections

Officials have steadily lowered their longer-run unemployment outlook as wages fail to accelerate. It’s possible that Fed officials could also mark down their 2018 and 2019 projections -- both at 4.1 percent -- when they meet this week.

Powell has cited long-depressed male prime-age participation as one sign that there might be more room for hiring. Just 88.5 percent of men in that 25-to-54 year age group work now, down from close to 98 percent in the 1950s.

That means millions of working-age men are sidelined. Opioid abuse and high incarceration rates could be drivers. Some 10 percent of adult men not in prison had a felony conviction in 2010, up from less than 5 percent in 1980, research shows. And criminal histories are a hiring barrier -- as Zito’s story illustrates.

‘New World’

“You get out, and it’s a whole new world,” he says. Zito read extensively behind bars -- from Charles Dickens to Socrates -- but picked up few tradeable skills. He also had little expertise to build on, he says, because he was just getting his life together at the time of his arrest.

His mother shot his abusive father before he was two, and growing up he cycled “in and out of trouble.” But by the time he was 30, things were looking up: his wife was working as a secretary and he was headed to culinary school.

Now he’s trying to get on the ladder again, from the halls of a historic, cavernous building in Queens.

“The place was built in 1928, so trying to maintain it -- and they don’t give a huge budget for maintenance -- it’s kind of challenging,” he says, pronouncing it “yuge” like a true New Yorker. “Almost every tenant in the building has come through and said I make a difference. And that’s special.”

--With assistance from Matthew Boesler

To contact the reporter on this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net.

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Alister Bull, Randall Woods

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