Are We Really on a Rapid Glide-Path to Full Employment?
Evan Soltas asks some questions about how much slack remains in the economy, some directed at my recent deck on the issue (which has been edited—grabbed the wrong quarter as the trough for a couple of series—all that really changes is lower relative growth in business investment in the current recovery).
Jared and Dean have largely answered his first question on quits, but since he re-poses it in his latest, here goes my answer, largely mirroring theirs—the quit-rate is actually about where it was in the middle of the recession. It’s headed generally up, but in the latest month’s data is back to where it was in September, so I can’t really look at this and think that slack is fading so fast we’ll run up against capacity constraints soon. As an aside, I’d just note that Evan occasionally implies that I’m arguing that there has been no reduction in slack since the recession. That’s not true—I don’t argue that anywhere.
Further, I’m not exactly sure what to make of his linear projection of unemployment combined with futures markets’ expectations of short-term rate hikes in coming years. He finds that combining the two imply short-term interest rates will still be very low even when unemployment is very low, and takes this as evidence that monetary policy is actually on a very (maybe even riskily?) accommodative path. But isn’t the more likely interpretation of these series simply that futures markets don’t believe his linear unemployment projection is likely to come to pass?
If these markets don’t believe this, I think they’re right. Unemployment declines have simply been significantly over-performing other macro indicators in recent years. As Dean notes, unless we think that the 0.7 percent productivity gain in 2013 is the best we can do, then employment growth has been too-high relative to GDP growth. And unless we think that a large portion of the prime-age workforce made an odd decision to voluntarily withdraw that just happened to coincide with extreme labor market distress, then unemployment declines have been too-large relative to underlying employment growth. Yes, I fully expect GDP growth to be better in 2014 than in 2013, but so should productivity growth and eventually we will see some return of the very large stock of potential workers not currently engaged in active search.
It’s true that there is an implicit argument that I should have made explicit in my piece. I don’t weigh the danger of overshooting on stimulus as low—I weigh overshooting as a positive good that we should aim for. Even the very meager (and likely cyclically depressed) productivity trends we’ve seen over this business cycle relative to wages for the vast majority of workers show large amounts of ground to make up (figure below shows real wages for various percentiles, indexed to 2006).
Finally, it’s true that having the Fed keep interest rates near-zero until chock-full employment had been reached would be “extraordinary.” So what? We live in extraordinary times. And extraordinary doesn’t mean reckless or unsupported by evidence and research. Many models of optimal monetary policy in a liquidity trap say indeed that the central bank should keep rates policy rates low well into the recovery (especially when no boost is coming from fiscal policy).
Evan finally demands what we want do about all of this, given that monetary policy is still pretty supportive of spending. The answer is simple—finish the job. Pull back after real wage-growth starts to outrun productivity growth and not before. Even Evan thinks we’re not at full-employment yet, and plenty can happen in coming years before we get there, and there’s definitely a constituency for pulling the plug sooner rather than later. Just this morning I testified before the monetary policy sub-committee of the House Financial Services Committee against three other witnesses arguing that the Fed should be flat-out forbidden from engaging in non-Treasury QE. Even if I thought that current macro policy had us on a smooth glide-path to full-employment soon (and I don’t) this hardly guarantees that nothing (especially misguided policy maneuvers) is capable of knocking us off the path before we get there.
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