Jared Bernstein, United States, Federal Reserve discussed on The Indicator from Planet Money


Everyone it stacey and Cardiff and this is the indicator from planet. Money Today on the show are we there yet and by their we mean is the US economy at full employment yet or candle labor market. Get even stronger than it already is. Now this seems kind of obvious but it. It is actually a much trickier question than you might think. Because the definition of full employment is kind of unclear that's right the Federal Reserve for example says that the US economy Konami maximum employment. That's another phrase for full employment when all Americans that want to work are gainfully employed but another definition. That economists honest sometimes use is whether all workers are employed in jobs that make the best use of their skills so that the quality of the jobs matters to and not just whether there there are enough jobs and finally a lot of economists say the labor market is a full employment. Only when it can't get any better without inflation taking off the idea. Is that if enough forcus have jobs. Then companies have to pay higher salaries to attract new workers and the companies then offset the cost of paying those higher salaries by raising the prices of what they sell prices going up. That is inflation. So you've got these different definitions and plus it's hard to measure just how strong. The labor market is in real time. In the first first place so the best we can do is to look at a bunch of economic indicators to get an overall picture and then make an educated guess as to whether the economy is at full employment so historically to get an idea of what full employment is people would look at the unemployment rate so right now the unemployment rate is super low just three point five percent that what is the lowest in more than fifty years. So does that mean we're at full employment well to help answer that question. We are going to be joined today by an old towel. This show L. Economists Jared Bernstein. He is brought three indicators for us that he thinks offer better signals as to whether the economy is at full employment. That is coming up right after the break support for this. NPR podcast and the following message. Come from the. Ymca a nonprofit but that helps fill the gaps and bridge the divides in ten thousand communities. Nationwide learn more about the impact of your donation at Ymca Dot net slash giving the why for a better US shared Bernstein. Welcome back to the PODCAST. Thanks so much for inviting me. So Jared Before anything cards on the table here you do not think. The economy enemy is at full employment right despite the unemployment rate being so low correct. I don't think we're at full employment yet. We're closing in on it but we're not there. That seems crazy because when I was growing up the unemployment rate was always five percent so when five percent of the population was unemployed than that meant it was at full employment and now we're at three three point five percent unemployment and you still think like no we could. We could push it further well first of all. I applaud the fact that when you were growing up you knew what the unemployment rate was so. That was a very sophisticated shut. It makes sense that you ended where you did. That's probably true. I think the challenge with the unemployment rate is that for decade upon decade economists. Honest thought we knew the lowest unemployment rate consistent with stable inflation and we thought that number was six and then we thought it was five and then we thought it was four. And now if we're being being honest we have to recognize that we don't really know what that number is so we have to turn to other indicators to evaluate whether we're truly at full employment or not okay okay. I'm definitely willing to hear you. You always have very interesting smart points to make so you have three indicators about whether or not we're at full employment what is your first indicator gainer. My first indicator is inflation and the inflation gauge. The Federal Reserve watches most closely was recently seen growing at one point. Eight percent year over year a year now listeners to our show probably know that The Fed target say two percent inflation rate so inflation is below two percent That would argue that. We're not quite at full employment generating the sort of pressures that Cardiff mentioned earlier. And it's not just last month that we had this in fact inflation has been below. Hello it's target for about ten years so I would say the most common reason economists would argue that. We're not quite a full employment yet. Is this persistently below target inflation rate. But that but one point eight percent is barely below two percent or am I looking at this wrong because it seems like we're basically to. That's why I cited this long term result. Sure if you if you spend a month below two percent that doesn't tell you anything if you spend ten years below the two percent target that tells you a lot okay. So that's indicator here number. One inflation jared what is indicator number two well indicator number two is a pretty intuitive one and that's wage growth now. Wages have grown more quickly as the unemployment rate comes down and that makes a ton of sense because workers have a bit more bargaining power in tight labor markets. I mean anytime you can tell your employer no thanks or take this job and shove or some variation between those two poles of the gay day. That's that's a day when you expect to see some wage pressure because at very low unemployment employers have to bid up their wage increases to get and keep the workers they need but with unemployment rate at a fifty year low. Oh you might expect to see more wage pressure than we're seeing One frequently cited series was last seen growing at three point two percent year over year. Now that's better than the two percent Kind of growth. We saw a while ago and by the way this relates to my indicator one slow inflation wages that are growing a little bit north of three percent with inflation flation below two percent that means real wage gains so. That's a very good thing for working people but wages should be growing little bit faster if we're truly at full employment and they're up in jared. There is historical evidence that wages can grow faster than they're growing. Now Right. I mean wages were growing faster than then the current pace back in the nineties. Yes they were. But there's a very important asterisk here and that's that back in the nineties. Productivity growth was faster and when productivity he is growing faster employers can dole out wage increases while maintaining their profit margin. So kind of what you're seeing here is really a struggle between in worker. Power and employer power trying to claw back for the workers a bit more share of the growth so jared your first two indicators that that maybe we're not at full employment are that prices aren't growing as fast as they could be. Wages aren't growing as fast as they could be. What is your indicator number? Three indicator number three is less well known the first two but it's labor share of national income so national income is all the compensation all the money in people's paychecks plus all the prophets that Companies Make and so and there's some other cats and dogs in there but basically it's the income that the economy generates and you want to ask yourself what share of that income is going to workers. That's the Labor share of national income and historically at economic peaks that share has stood at sixty six percent. Now even though it's been increasing late which is a good sign and related to the tightening job market. It's at sixty three percent. So that difference between sixty three and sixty six percent can't three. Big percentage points of national income that to me also signifies were not quite at full employment yet. Well let me ask you this question. So we're at three point. Five five percent unemployment right now. Where do you think we need to get for full employment to happen like where would you be happy? Well in a way. It's a little bit of a trick question in because I've just our favorite I've just offered three different indicators that I think allow you to kind of triangulate full employment better than than the unemployment rate. But I've heard people now talking about three and even numbers below that and so I'd be more than interested to see what happens to Oh my three indicators. If the unemployment rate got down to levels that are even lower than it is today but there is a hugely important caveat here all of those indicators decatur inflation wage growth labor share have been down for so long that they need to grow faster than average for a while to make up lost ground and that that means we don't just need to get the full employment we need to get there and stay there for a while for workers to really feel the benefits. Jared Bernstein always a pleasure man my pleasure thank you. Jared sued was originally produced by Dr Rafi on the update was produced by Lena Sons. Geary our interns. Nadia Lewis in our editor is Paddy Hirsch Rush. The indicator is a production of N._P._R.. And again keep in mind. We'll be back next week all new episodes..

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