Summers Says U.S. Unemployment Is Now Below Its ‘Natural’ Rate

(Bloomberg) -- Former Treasury Secretary Lawrence Summers said changes in the U.S. job market caused by the Covid-19 crisis mean that the jobless rate is now likely below levels that trigger inflation even though it remains above its pre-pandemic trend.

With American payrolls still down by almost 5 million compared with the peak before Covid-19 struck, theory would suggest there’s enough job-market slack that it wouldn’t cause inflationary pressure. But some economists have discussed the risk that the pandemic has persuaded a swath of the population to permanently leave the workforce -- such as by retiring early.

“Given the vast structural changes under way after Covid, we’ve probably got unemployment below the natural, or neutral, rate,” Summers said on Bloomberg Television’s “Wall Street Week” with David Westin Friday.

The natural rate of unemployment refers to the lowest level at which it doesn’t tend to spur inflation.

Summers spoke after the Labor Department’s September employment report showed a weaker-than-expected 194,000 gain in payrolls, with the unemployment rate dropping to a pandemic low of 4.8%. Thousands of Americans -- especially women -- left the labor force and gave up looking for jobs, the data showed.

“We’ve got a lot of demand. We don’t have so much supply,” said Summers, a paid contributor to Bloomberg and Harvard University professor. “That’s why the unemployment rate came down more than people expected. That’s why the wage growth was much higher than people expected.”

One of the conditions Fed policy makers have set for boosting interest rates is achieving “maximum employment.” At their July meeting, several participants said pre-pandemic conditions “may not be the right benchmark against which” to assess progress toward maximum employment, minutes showed.

With interest rates “way below” Fed officials’ estimated neutral level of 2.5%, and the jobless rate likely below its own natural rate, “that’s just not a combination that adds up to anything other than taking a big risk on the inflation side,” Summers said.

He reiterated his view “that markets are not fully pricing in the risks of a tail event, where the rate goes up pretty fast,” Summers said.

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