MNI INTERVIEW: US Jobless Rate Masks Slack -Blanchflower Paper

The U.S. job market is weaker than Federal Reserve policymakers believe because officials are focused on historically-low unemployment and a high vacancy rate, but neither is correlated with wage growth, according to forthcoming research ex-Bank of England MPC member David Blanchflower shared with MNI.

Fed Chair Jerome Powell told reporters this week that the labor market is “extremely tight,” pointing to rapid employment growth, a 3.6% jobless rate and a large number of job openings. He and other officials say this strength suggests the economy can avoid a recession despite rapidly rising interest rates.

“The labor market is not tight. The vacancy to unemployment ratio is negatively correlated with wage growth,” said Blanchflower, now a professor of economics at Dartmouth College and also a former visiting scholar at the Boston Fed. (See: MNI: U.S. Staffing Firms Say Job Openings Data Inflated)

The paper, set for publication by the NBER, argues that the low-cost nature of posting new jobs makes it “unclear there is any information in these data.”

“Vacancies tell us little about the number of hours under offer in the jobs, where they are and in what occupations,” the paper notes. “No information is available on the pay under offer in any vacancy. We have no idea where they are and in which occupations and how much of a mismatch there is with the unemployed.”

MEEK WAGE GROWTH

Blanchflower said his findings help explain why wage growth remained tame over a prolonged period of strong U.S. job growth, and why even recent gains have not kept up with inflation.

“Real wages are falling rapidly at present and, prior to that, real wages had been stagnant for quite some time,” he argues, adding that the unemployment rate “is not key to understanding wage formation in the USA and hasn’t been since the Great Recession.”

The unemployment rate is “irrelevant in the face of other variables which show you lots of slack,” he said, citing the nonemployment rate and the underemployment rate.

“The nonemployment rate is 4.6 percentage points below where we were in 2000 and the underemployment rate hasn’t mean reverted either, so two non-mean reverting variables explain wage growth,” the former policymaker said.

DEEP RECESSION

Blanchflower’s past work argued back in August 2021 that the U.S. economy would enter recession in January 2022 based on plunging consumer expectations about the future, well before there were any hints that GDP would register two quarters of contraction in the first half of the year.

He told MNI’s FedSpeak podcast last month that much of the world economy is already in recession.

He still thinks the downturn which he believes the United States has already entered could be deeper than the Great Recession, with unemployment rising into the double-digits in part because of lessened policy ammunition both on the monetary and fiscal fronts.

“The Fed can’t cut rates from 5% to zero. There are limits on what they can do on QE. What could Biden get through Congress on the fiscal side?” Blanchflower said. “The worry to me is that if you look at the decline in confidence it’s broadly comparable to what you saw in 2008 and the ability of the authorities to fix it is more limited.”