Will the jobs report for May, to be released Friday, show that the U.S. labor market is on a new, historically more consistent course? For some time, these data have shown an unusual combination of robust job creation and a low unemployment rate along with sluggish wage growth and a labor force participation rate stuck at low levels. This apparent disconnect has confounded economists and made the post-crisis recovery uneven and unsatisfactory for many.
The hope is that these factors will have started to realign in earnest in May in a way that supports higher and more inclusive growth. The likelihood is that this shift will continue to take time, will be sequential rather than simultaneous and won't fully meet the economy’s considerable potential without greater efforts from both the public and private sectors.
Economic theory and historical experience suggest that companies have to compete a lot harder to attract and retain employees as the unemployment rate drops. This dynamic pushes wages higher and, more generally, improves working conditions. That, in turn, brings people back into the labor force.
The first part of this causal relationship has been working well. The U.S. economy has been one of the most powerful job-creation engines in the world for several years. This has consistently pushed the unemployment rate down; in April, it reached 3.9 percent, a historical low. Meanwhile, vacancy indicators suggest that more companies will have to compete for a dwindling supply of available labor.
Yet, so far, this demand hasn’t been reflected in a consistent improvement in wages, which were growing at a relatively sluggish annual rate of 2.6 percent in April. Nor has there been an increase in the labor participation rate, which was languishing at 62.8 percent, while the employment-population ratio was 60.3 percent.
Economists have yet to come up with a sufficiently precise and convincing explanation for the stagnation. The initial post-crisis emphasis was on cyclical influences that fueled a deficiency in aggregate demand. More recently, however, more attention has been devoted to technological influences, changing sectorial trends, human capital shortfalls and lingering (post Great Recession) risk aversion on the part of employers.
With any luck, the May data will show a pick-up of wages and perhaps even in the number of people re-entering the labor force. Were these developments to materialize, they would support both the demand and supply sides of the economy by boosting household income and increasing productive capacity. Both would help counter a significant increase in inequality of income, wealth and opportunity.
None of this can be sustained without greater efforts by the public and private sectors. Technological displacements, skill mismatches, demographics and the changing nature of the workplace are likely to slow the upward movement in labor participation. But rather than view this as inevitable, both companies and government agencies should do more to adapt to the structural realities.
In the U.S. these days, government policy breakthroughs are a lot less about fiscal and monetary policies than about structural and supply influences, especially after years of unconventional Federal Reserve measures and the recent tax cuts. Education reform has long been seen as a “must do” for an economy trying to sustain higher and more inclusive growth. Infrastructure modernization and immigration reform would also help.
Successful change in these areas may have less to do with design than with the political will to carry out reforms. The longer political implementation is delayed, the greater the need for corporate programs to help sponsor, mentor, apprentice, equip and train workers, especially those from marginalized segments of the population. Continued progress on family-friendly policies (that recognize the dual roles of employees as workers and care givers and the importance of elder care) would also help a great deal.
The likelihood is that the May data will show that the economy is still able to create jobs and keep unemployment low, despite other late-cycle characteristics. Wages will likely edge up as part of a multimonth trend. But moving the labor participation rate to higher levels will remain challenging. And the longer this is left unaddressed by the public and private sectors, the greater the headwinds to the inclusive medium-term prosperity that the U.S. economy is able to deliver.
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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