econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 27 October 2015

What If Low Inflation Is Impeding Hiring

by Gene D. Balas

Recent trends suggest that the traditional relationship between employment and inflation could be turned on its head. Economic theory has long held that, when the unemployment rate falls, tighter labor markets would force wages - and thus inflation - higher. This forms the basis of the Phillips Curve, which formalizes this relationship.

philips.curve.380x180

However, that hasn't seemed to hold true in the current environment, where unemployment has now fallen to 5.1%, according to data from the Bureau of Labor Statistics, almost to levels believed to be "full employment," and where inflation would normally begin to reassert itself. Wage gains, however, have not accelerated. Recently, several notable Fed policymakers, including Fed Governors Lael Brainard and Daniel Tarullo, have observed that the Phillips Curve might not be instrumental as a foundation of monetary policy in the current environment and that traditional relationships may not now hold true.

balas.2015.0ct.21.1

Indeed, observe on the graph above the inverse relationship between the unemployment rate (red line) and hourly earnings (blue line), in data from the Bureau of Labor Statistics. This typical relationship - wages tend to rise when unemployment falls and vice-versa - can be observed up until the past few years, when hourly earnings have trended lower, even while the unemployment rate continued to fall by a remarkable amount.

Here's another wrinkle: job openings, reported by the Bureau of Labor Statistics in the Job Openings and Labor Turnover Survey (or JOLTS report), surged to nearly a record high (green line on the graph below) since the recession-era nadir, yet hiring (blue line) has failed to keep pace at the same rate. Indeed, the past two jobs reports from the Bureau of Labor Statistics have disappointed, with fewer new jobs created than investors expected and with muted wage gains. Meanwhile, the number of employees who quit their jobs (red line) - presumably to take a better-paying job - has failed to rebound to its prerecession peak. There are a number of theories on why companies are slow to fill those open positions - and why workers are not leaving their current jobs to take new ones - and these have centered on a few different theses.

balas.2015.0ct.21.2

One factor might be that companies aren't finding qualified workers. Bill Dunkelberg, the Chief Economist of the National Federation of Independent Businesses (NFIB), noted,

"The percent of owners citing the difficulty of finding qualified workers as their Most Important Business Problem increased and is now third on the list behind taxes and regulations. This is the highest reading since 2007 and suggests that employers will continue to face wage pressure in order to attract and keep good employees."

In fact, 53% of small businesses reported job openings, and 45% of them reported having few or no qualified applicants, according to the most recent NFIB monthly Small Business Trends report.

So, thus far, that thesis observed by the NFIB that wage gains may become evident dovetails nicely with the economic theories of inflation and labor market tightness. However, the question is will employers offer those higher wages, or will companies simply allow job openings to go unfilled?

When businesses make a decision to hire someone, they must also consider whether that hire would be profitable. In other words, paying higher wages would make sense - if companies could raise their prices or increase their sales in tandem. But if a company might doubt whether the added wage expenses could be offset through higher prices, they may hold off on increasing starting pay or giving their existing workers pay raises.

Thus, rather than higher wages pushing inflation higher, persistently low inflation - and expectations that inflation would continue to be low - may restrain hiring, to the extent that a new hire would require higher pay. Continuing with data from the NFIB survey, we see that only a net one percent reported raising their selling prices in September, and a net 13% plan to hike prices in the coming six months. Meanwhile, a net 16% planned to raise compensation in coming months. The report noted, "There are no signs of inflation bubbling up on Main Street."

Certainly, should employers expect higher prices in months ahead, they might likely consider raising compensation levels in tandem. Herein lies the Fed's dilemma: it wants higher inflation, but in order to do so, it needs to inspire businesses to expect the Fed to be successful in that regard. And so far, the Fed has failed in its mission to achieve its 2% inflation target. In the Fed's preferred inflation gauge, the one tied to personal consumption expenditures published by the Bureau of Economic Analysis, we see that inflation increased by just 0.3% from a year ago and by 1.3% excluding food and fuel.

So, until and unless business owners can be convinced that they can raise their selling prices by more than this amount, or if they can achieve production increases augmented through productivity gains, employers may simply allow job openings to go unfilled. That can restrain hiring, and economic growth more generally. And, most importantly, it is an instructive lesson on just why it is that the Fed wants to increase inflation: higher inflation expectations can actually be good for hiring and economic growth more generally.

This was posted originally in Investment Mangement Market Reflections, United Capital Financial Life Management, 21 October 2015 and is reproduced here with permission.


Disclosures

Investing involves risk, including possible loss of principal, and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained in this piece is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial adviser with questions about our specific needs and circumstances.

The information and opinions expressed herein are obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital. Opinions expressed are current as of the date of this publication and are subject to change. Certain statements contained within are forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue

reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.


© 2015 United Capital Financial Advisers, LLC. All Rights Reserved

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Opinion Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Opinion


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Are You Feeling the Economic Surge?
Big Mess in Italy
News Blog
Scientists Find Giant Underground Ice Reserve On Mars
Sustained 3 To 4% GDP Growth Is A Huge Stretch
New Earthquake Risk Model Confirms Possibility Of Statewide Earthquake In California
Subprime Auto Debt Grows Despite Rising Delinquencies
Silver Sentiment Looks Golden
Infographic Of The Day: Investing In A Cure For Cancer
Early Headlines: Trump Campaigning Still, WaPo Finds Voter Fraud Favored Trump, No Carolina GOP Shotguns For Voter Fraud, New Age Of Blacklisting, All Eyes On Italy, Big Bucks In India And More
What Did The EU Ever Do For Europeans?
The 10 Most Stolen Cars In America
Improvements In US Air Pollution
Has The Fed Been Effective In Stimulating Consumption?
Major League Soccer's Best-Paid Players
What We Read Today 02 December 2016
Investing Blog
Technical Thoughts: Manage Risk
Investing.com Weekly Wrap-Up 02 December 2016
Opinion Blog
Modern Slavery
Please, Donald Trump, Don't Send Climate Science Back To The Pre-Satellite Era
Precious Metals Blog
Silver Prices Rebounded Today: Where They Are Headed
Live Markets
02Dec2016 Market Close: WTI Crude Climbed Back Up To Previous 51 Handle, US Dollar Index Trading At The100 Level, Oil Rig Count At 10-Month High
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved