MNI INTERVIEW: Strong Jobs May Fuel US Productivity-Rothstein

A persistently strong U.S. labor market might be creating a positive cycle of economic activity and experimentation that is boosting productivity, potentially allowing for stronger wage growth that doesn’t necessarily fuel inflation, former chief economist at the U.S. Department of Labor Jesse Rothstein told MNI.

With workers in short supply, firms have to find creative ways to boost the efficiency of the existing workforce, he said.

“My reading is that when you have full employment you get productivity gains. This been a tremendous run of full employment that we’ve seen for longer than usual - all of a sudden you need to figure out ways to get more productive,” said Rothstein, also a former senior economist at the White House Council of Economic Advisors.

The latest inflation figures, which showed core CPI rising more than expected for a third month, were not particularly encouraging because they suggest price pressures could be stalling above the Federal Reserve’s 2% goal.

“It didn’t come down the way we hoped. It’s not out of control. It’s somewhat stable at a level higher than you might wish,” he said.

Rothstein said wage growth is a lagging indicator of inflation, which means there could be more catch-up to come in future contract negotiations – but not any sort of uncontrolled spike.

“Employers don't look at the inflation report each month and then adjust your wage to compensate. You get a raise once a year. They're necessarily going to lag inflation. So I suspect there is at least some catching up that we haven't yet seen,” he said.

“It’s not an indication that it’s going to continue to be really high in the future and lead to a wage-price spiral. If productivity keeps growing then we can afford wage growth without prices getting out of control.

LABOR MARKET RESILIENCE

The Fed’s insistence that it will bring inflation all the way back down to 2% could lead to greater damage to employment than has been felt so far, said Rothstein, now a professor at the University of California at Berkeley.

“The Fed doesn’t have many tools for bringing inflation down. So if it thinks it’s super important to bring it down from 3% to 2%, then all it can really do is inflict pain on the real economy,” he said. (See MNI POLICY: Fed Won't Hesitate To Ease If Employment Falters)

“So far they haven't done as much damage as we might have thought from higher rates. The labor market has stayed fairly close to full employment.”

The U.S. economy generated a stronger-than-expected 303,000 new jobs in March while the unemployment rate fell to 3.8%. Rothstein said the strength of the labor market in the face of one of the most aggressive Fed tightening campaigns in history remains a mystery.

“It’s a puzzle. A lot of our models are less useful than we thought they were,” he said.

As for whether we will see a deterioration this year, Rothstein said he hasn’t thing anything in the data to suggest it yet.

“The two stories one could tell are that the monetary policy tightening of the last couple of years may eventually, with long and variable lags, start to bite more than it has already, or that higher-than-expected inflation today may lead to tighter monetary policy that eventually slows the labor market down,” said Rothstein.