Let the U.S. Jobs Machine Run Hot a While Longer

(Bloomberg View) -- The employment scene in the U.S. last month was disappointing, though not because job creation was a little off the boil.  

Yes, 156,000 employees added to payrolls was less than many economists forecast. And, yes, the jobless rate picked up a bit to 4.4 percent. That's still very low by historical standards. Even 156,000 really isn't terrible, given that economists tend to overestimate August's growth rate. 

The disappointment is that, again, wage growth is anemic. It's especially disappointing given that the U.S. expansion is eight years old and counting at a time when the world economy is finally showing signs of an upswing. More boats rowing in the same direction ought to give workers in the mother ship a little more money.

Granted, this isn't a uniquely American problem. That isn't an excuse for not asking hard questions about what is going on here. Some Federal Reserve policy makers sound increasingly skeptical about the traditional argument that a tight labor market will translate into significant compensation gains and faster inflation.

Philadelphia Fed economists published a paper last month that concluded this relationship was a poor one. The paper, co-authored by Philadelphia Fed Director of Research Michael Dotsey, shows that forecasting models based on the so-called Phillips curve don’t really help predict inflation when unemployment is low. The link works when the labor market is weakening -- when rising unemployment can predict slower inflation -- but not so much in the other direction.

And it's that other direction that's the concern. On balance, another month of soft wage numbers will probably strengthen the hand of those at the Fed who want to wait a while before raising interest rates again.

The Fed is in a de-facto pause now anyway. Officials have widely telegraphed that this month's Federal Open Market Committee meeting will focus on the question of balance-sheet reduction. It won't be until December that the issue of nudging borrowing costs higher is seriously on the table.

Happily, there will be a few more months of data between now and then. Things could still start to click on wages. It's entirely possible that the models will kick in, perhaps just at a lower level of unemployment. That's a good argument to let the U.S. job-creating machine run hot a while longer.

Let's find where that magical unemployment tipping point is: 4 percent, 3.5 percent or even 3 percent. For all we know, it could be lower. We might even learn something about models and their durability. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss writes and edits articles on economics for Bloomberg View. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

To contact the author of this story: Daniel Moss at dmoss@bloomberg.net.

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