(Bloomberg Opinion) -- Don’t get me wrong. Job creation and wage growth are still important things to watch for in the monthly U.S. jobs report for February that will be released on Friday. But other, more partial indicators already suggest that those two aspects of the labor market will remain solid (though not as exceptionally strong as in recent months, particularly when it comes to new jobs). The focus now should also be on the labor-force participation rate because the pace of re-engagement of workers is a potentially important influence on aggregate demand, the economy’s supply potential, inequality and the accommodative nature of Federal Reserve policy for markets.
These partial indicators -- drawn from private sector surveys, company reporting or measures of job vacancies -- suggest that the labor market remains healthy. This should drive monthly job additions for February within or above the 120,000-150,000 range that would be predicted for this late stage of the economic cycle based on historical precedents. While that would be lower than January’s blockbuster 304,000 number, it is consistent with a pace that would continue to underpin solid consumption growth and better household finances, especially if supported by steady annual wage growth of 3 percent to 3.5 percent.
Where the unemployment rate, at 4 percent for January, ends up will increasingly be a function of the labor-force participation rate, which has encouragingly crept higher, from 62.7 percent to 63.2 percent, over the past 12 months.
Despite the recent improvement, the overall labor participation rate is still relatively low in historical terms, especially when compared with the peak levels of more than 67 percent attained in the 1990s. Indeed, last month’s level was essentially the same as four years earlier. Several reasons have been cited for this, from skill mismatches and workers’ disability issues to technological displacement and insufficiently family-friendly policies such as affordable day and parent care.
A participation rate that is trending higher is desirable in three important ways: It supports the demand side of the economy by further boosting household income; it improves the supply potential, especially as a growing number of firms have already been signaling growing labor shortages; and it helps contain income inequality at a time when those on the lower echelons of the income distribution scale have already and persistently fallen well behind those who are better off in terms of income growth, wealth and opportunities.
Markets should also hope for greater labor participation. By helping to counter inflationary pressures, even though they’re moderate right now, and by suggesting residual slack in the economy, a higher reading would encourage the Fed to maintain the highly dovish policy stance it pivoted to in January. That would fuel the type of loose financial conditions that favor risk assets (both directly and by reducing volatility and giving investors greater confidence to buy on dips).
For the well-being of the economy and short-term asset values, as well as for a Fed that is under increasing political pressure and whose credibility has taken a hit from the recent policy U-turn, the hope is that the February employment report will deliver more than solid job creation and continued wage growth. A 0.1 percentage point to 0.3 percentage point rise in the participation rate would, especially if continued, provide comfort for those who worry that America’s late cycle dynamics may not be enough to power the economy to another year of 2.5 percent to 3 percent expansion, especially given the fading effects of the one-off boosts to growth and the headwinds from abroad.
Together with the higher business investment reported in the fourth-quarter GDP report, an increase in the participation rate would point to more favorable structural tailwinds, which would also help growth be more inclusive. This would be a lot better than a decline in the participation rate, which would signal a labor market that remains structurally impaired, a higher threat of a greater marginalization and alienation of the less fortunate segments of society, and a Fed that’s more exposed to the risks of miscommunication and further policy flip-flopping.
To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. His books include “The Only Game in Town” and “When Markets Collide.”
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