EUR 441.86 For Business Accounts Only

The State of the U.S. Labor Market

Maximum sustainable employment is one side of the Fed’s dual mandate and connected to the price-stability mandate in minds of many at the Fed via the Phillips-Curve relationship between unemployment and prices. In March 2014, Yellen appeared to elevate the employment objective above the price-stability objective with her dashboard of labor-market indicators, which included a soft target of 3%-4% wage growth. With average hourly earnings growth running only 2½%, some commentators have argued that there is still sizeable hidden unemployment. We argue that Yellen’s desire for 3%-4% wage growth was predicated on a much higher growth rate of productivity than the U.S. economy appears capable of delivering. Also, the high level of job openings—especially in relation to unemployment—implies there is a skills gap. Companies have become much more reliant on outside hiring to fill positions. Dusting off a 1988 model by Yellen, we argue that more cautious quitting behavior relative to the cycle may be a factor in the skills gap. Other labor market indicators, such as the share of self-employment, suggest a preference shift by households towards employment, while birth and deaths of new establishments and jobless claims argue that the gales of creative destruction are somewhat becalmed at present. This preference for employment may be a factor in modest wage gains.