MNI INTERVIEW: Wage Growth To Stay Contained -Fed Economist

By Jean Yung

     WASHINGTON (MNI) - A shadow supply of workers is keeping a lid on wage

growth and inflation even as unemployment remains near 49-year lows, Atlanta Fed

economist John Robertson told MNI in an interview, adding that the benign

combination seen as making it easier for the Federal Reserve to delay its next

rates move could persist some time more.

     Tight competition for workers has driven wages steadily higher over the

past year, culminating last month in the strongest year-on-year gain in average

hourly earnings since the recession. Growth in the average wage level of

continuously employed people, as measured by the Atlanta Fed's Wage Growth

Tracker, also climbed nearly a full point in 2018 to 3.9% in November as the

unemployment rate sank to near-record lows.

     But while wage gains have finally reached a pace where they "need to be

watched closely," they do not yet point to an overheating labor market,

Robertson said. "If you get a disconnect between wage and productivity growth,

then you have a potential problem. It can be inflationary. But we're not seeing

that at this stage."

     Absent indications that rising labor costs are feeding into more rapid

price inflation, Fed officials see little risk that inflation will surprise to

the upside. And with little inflationary pressure in spite of sub-4%

unemployment for the past nine months, the FOMC can be patient in assessing the

economy's trajectory in 2019.

     --PAYS TO STAY

     Around mid-2018, the Wage Growth Tracker shows compensation for workers who

stayed in their jobs jumped to its highest rate since the recession. It is now

rising at the same pace as that of people who switched jobs, or about 4%

annually.

     "One interpretation is the cost of losing staff maybe has reached a point

where many employers are boosting pay of current employees by more than in the

past to reduce turnover. What that is telling us is the labor market is really

getting tight," Robertson said, noting that wage growth convergence between

stayers and switchers has never before been seen during a tight labor market in

the 20 years that the Atlanta Fed has been tracking the data.

     --SHADOW LABOR SUPPLY

     By many measures, the U.S. labor market is in "places we've never been

before in terms of indicators of tightness," Robertson said.

     Compared to a decade ago, the jobless rate is lower, the gap between the

number of unfilled jobs and hires is wider, employees are quitting at higher

rates and fewer workers are getting laid off and filing for unemployment

benefits.

     But tepid wage growth has disappointed policymakers and workers even as job

creation keeps surprising on the upside. Robertson noted there is still room to

run on some labor market measures. "If you look across recent growth of the

labor force, the participation rate and wage measures, you see indication that

there isn't excess tightness," Robertson said.

     He attributes that to a "shadow labor supply" entering the workforce fast

enough to keep a lid on wages. People in their prime working years, from 25 to

54, in particular high school educated women, are being coaxed back to work as

the job boom continues.

     The participation rate has reached higher levels than Robertson expected,

although he questions how much longer that can continue. "It's uncertain how

much further prime-age participation will climb, but sustaining labor force

growth will help limit overheating in terms of higher labor costs," Robertson

said.

     --PHILLIPS CURVE

     Now that wage growth has reentered the 4% zone where it was prior to the

recession, the measure merits careful watching, Robertson said. "If it continued

moving up from there, we'd want to understand why it's moving up."

     And if the connection between low unemployment and higher price levels

appears to have weakened, it would be unwise for the Fed to underestimate the

risk that it could reemerge.

     So far, firms are telling the Fed that they are coping with the tight labor

market, even if it means limiting expansion plans.

     "Higher wages accompanied by high productivity growth is the Goldilocks

economy," Robertson said. "We've had a decade of lackluster productivity growth.

It's a little too early to say that the trend has shifted."

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

[TOPICS: MMUFE$,M$U$$$,MT$$$$,MX$$$$]