Memo to inflation hawks: We are not at full employment

Please don’t be distracted by the drop in the unemployment rate today to 4.6 percent—which, incidentally, fell largely because of a drop in labor force participation. The most accurate measure of labor market slack (and thus, the most accurate indicator of when the Federal Reserve should raise interest rates) continues to be nominal wage growth, and all signs point to an economy continuing to recover. Wage growth should be much faster in a full employment economy, according to the Fed’s stated targets for inflation, which, last I checked, remains at 2 percent and long-term trend productivity growth, which has been running about 1.5 percent. (The recent slowdown in productivity could arguably be because of the low cost of labor and, therefore, reduced incentives to invest in capital and would likely rebound as labor markets get genuinely tight and start pushing wage-growth up.) Taken together, we are looking at target wage growth above 3.5 percent.

But year-over-year nominal wage growth came in at 2.5 percent last month. The figure below shows some indications of a pickup in the last few months, but no one should be counting their chickens until they are hatched. At 2.5 percent, growth noticeably slowed compared to last month’s high water mark of this recovery at 2.8 percent, or the previous month’s 2.7 percent. Yes, wage growth is now faster than it was in the first 5+ years of the recovery, when it averaged 2.0 percent. But, it doesn’t reflect full employment wage growth, or even the wage growth we experienced before the Great Recession hit – by no means a full employment economy.

Nominal wage growth has been far below target in the recovery: Year-over-year change in private-sector nominal average hourly earnings, 2007–2017

All nonfarm employees Production/nonsupervisory workers
Mar-2007 3.59% 4.11%
Apr-2007 3.27% 3.85%
May-2007 3.73% 4.14%
Jun-2007 3.81% 4.13%
Jul-2007 3.45% 4.05%
Aug-2007 3.49% 4.04%
Sep-2007 3.28% 4.15%
Oct-2007 3.28% 3.78%
Nov-2007 3.27% 3.89%
Dec-2007 3.16% 3.81%
Jan-2008 3.11% 3.86%
Feb-2008 3.09% 3.73%
Mar-2008 3.08% 3.77%
Apr-2008 2.88% 3.70%
May-2008 3.02% 3.69%
Jun-2008 2.67% 3.62%
Jul-2008 3.00% 3.72%
Aug-2008 3.33% 3.83%
Sep-2008 3.23% 3.64%
Oct-2008 3.32% 3.92%
Nov-2008 3.64% 3.85%
Dec-2008 3.58% 3.84%
Jan-2009 3.58% 3.72%
Feb-2009 3.24% 3.65%
Mar-2009 3.13% 3.53%
Apr-2009 3.22% 3.29%
May-2009 2.84% 3.06%
Jun-2009 2.78% 2.94%
Jul-2009 2.59% 2.71%
Aug-2009 2.39% 2.64%
Sep-2009 2.34% 2.75%
Oct-2009 2.34% 2.63%
Nov-2009 2.05% 2.67%
Dec-2009 1.82% 2.50%
Jan-2010 1.95% 2.61%
Feb-2010 2.00% 2.49%
Mar-2010 1.77% 2.27%
Apr-2010 1.81% 2.43%
May-2010 1.94% 2.59%
Jun-2010 1.71% 2.53%
Jul-2010 1.85% 2.47%
Aug-2010 1.75% 2.41%
Sep-2010 1.84% 2.30%
Oct-2010 1.88% 2.51%
Nov-2010 1.65% 2.23%
Dec-2010 1.74% 2.07%
Jan-2011 1.92% 2.17%
Feb-2011 1.87% 2.12%
Mar-2011 1.87% 2.06%
Apr-2011 1.91% 2.11%
May-2011 2.00% 2.16%
Jun-2011 2.13% 2.00%
Jul-2011 2.26% 2.31%
Aug-2011 1.90% 1.99%
Sep-2011 1.94% 1.93%
Oct-2011 2.11% 1.77%
Nov-2011 2.02% 1.77%
Dec-2011 1.98% 1.77%
Jan-2012 1.75% 1.40%
Feb-2012 1.88% 1.45%
Mar-2012 2.10% 1.76%
Apr-2012 2.01% 1.76%
May-2012 1.83% 1.39%
Jun-2012 1.95% 1.54%
Jul-2012 1.77% 1.33%
Aug-2012 1.82% 1.33%
Sep-2012 1.99% 1.44%
Oct-2012 1.51% 1.28%
Nov-2012 1.90% 1.43%
Dec-2012 2.20% 1.74%
Jan-2013 2.15% 1.89%
Feb-2013 2.10% 2.04%
Mar-2013 1.93% 1.88%
Apr-2013 2.01% 1.73%
May-2013 2.01% 1.88%
Jun-2013 2.13% 2.03%
Jul-2013 1.91% 1.92%
Aug-2013 2.26% 2.18%
Sep-2013 2.04% 2.17%
Oct-2013 2.25% 2.27%
Nov-2013 2.24% 2.32%
Dec-2013 1.90% 2.16%
Jan-2014 1.94% 2.31%
Feb-2014 2.14% 2.45%
Mar-2014 2.18% 2.40%
Apr-2014 1.97% 2.40%
May-2014 2.13% 2.44%
Jun-2014 2.04% 2.34%
Jul-2014 2.09% 2.43%
Aug-2014 2.21% 2.48%
Sep-2014 2.04% 2.27%
Oct-2014 2.03% 2.27%
Nov-2014 2.11% 2.26%
Dec-2014 1.82% 1.87%
Jan-2015 2.23% 2.01%
Feb-2015 2.06% 1.71%
Mar-2015 2.18% 1.90%
Apr-2015 2.34% 2.00%
May-2015 2.34% 2.14%
Jun-2015 2.04% 1.99%
Jul-2015 2.29% 2.04%
Aug-2015 2.32% 2.08%
Sep-2015 2.40% 2.13%
Oct-2015 2.52% 2.36%
Nov-2015 2.39% 2.21%
Dec-2015 2.60% 2.61%
Jan-2016 2.46% 2.45%
Feb-2016 2.34% 2.40%
Mar-2016 2.37% 2.44%
Apr-2016 2.53% 2.53%
May-2016 2.48% 2.33%
Jun-2016 2.64% 2.52%
Jul-2016 2.72% 2.57%
Aug-2016 2.47% 2.42%
Sep-2016 2.67% 2.65%
Oct-2016 2.74% 2.40%
Nov-2016 2.53% 2.40%
Dec-2016 2.81% 2.54%
Jan-2017 2.48% 2.44%
ChartData Download data

The data below can be saved or copied directly into Excel.

*Nominal wage growth consistent with the Federal Reserve Board's 2 percent inflation target, 1.5 percent productivity growth, and a stable labor share of income.

Source: EPI analysis of Bureau of Labor Statistics Current Employment Statistics public data series

Copy the code below to embed this chart on your website.

Tightening before a period of strong wage growth will lead to price and wage targets hardening into ceilings, and that will cause grave damage to the economy. Such premature tightening will be avoided if the Fed’s decisions truly are data driven. Slowing the economy by raising rates simply isn’t doing right by American workers.