Raining on the Jobs Data Parade

Today's numbers don't mean the Fed won't have to tighten again.
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Half a World Away

JACKSON HOLE, Wyo. -- Hey. The November

employment report


released this morning.

The Potential Workers column in the table below -- the sum of the "Unemployed" series from

Table A-1 and the "Persons who currently want a job" series from

Table A-10 -- tracks

The Pool the central bank keeps mentioning. It's fallen an average 798k per year since the mid-1990s (

G. Love

was pointing this

out as far back as February), and it preserved that trend last month: The 466k decrease it shows between November 1998 and November 1999 marks its 45th (!) straight year-on-year decline.

The other two columns in the table show the U-5 jobless rate (a good proxy for The Pool) and the U-6 jobless rate (a close cousin), both available in

Table A-8 of the employment report (and histories of which are available

here). They're both still showing notable year-on-year declines.

Technical Aside.

The numbers in the table above are not adjusted for seasonality. As such, year-on-year comparisons -- not monthlies -- are the right ones to use. Just for the hell of it, every month I adjust the U-5 jobless rate with the seasonal factor from the headline one. That rate fell to 5% last month from 5.1% in October; it stood at 5.4% in November 1998.

These numbers say (at least to your narrator) that policymakers are probably still leaning more toward mean than they are toward nice.

Yes. There is probably some merit to the claim that an

average hourly earnings

(or AHE) increase of only 0.1% (compare to a 0.3% trend) will make them feel at least a little less mean than they did going into the report. One district bank president already called the AHE number "extremely benign and very good indeed," and the

minutes from


meetings past show that the series is mentioned specifically.

Yet this correspondent is guessing that the AHE number will provide only a little comfort at best -- for three reasons.

(a) There exist far better measures of pay.

And the aforementioned minutes -- look for references to "nominal labor compensation" -- show that policymakers are looking at them, too.

Neither the AHE series nor the wage and salaries

portion of the

Employment Cost Index

(or ECI) includes equity-based pay (such as stock options) or things like hiring, retention, and referral bonuses -- yet the


numbers released alongside the


numbers do. This makes them a better real-world measure of compensation -- and note that they show increases between 4.6% and 5.2% (against an AHE increase of 3.4%).

(b) The AHE series can prove misleading anyway.

Suppose there are 10 L workers in Year One each earning $20 per hour. Each of these workers receives a 10% pay increase to $22 per hour in Year Two. But in Year Two, two N workers are hired at $10 per hour. The average wage for the 12 workers in Year Two is easy to calculate. Ten workers are paid $22 each, for a total of $220. Two workers are paid $10 each, for a total of $20. The 12 workers together are paid $240, or an average of $20 each.

In this illustration, there has been no change at all in the average wage from Year One to Year Two! But -- and this is a very important but -- 10 workers enjoyed wage increases of 10%, and two workers went from unemployment to jobs paying $10 per hour.

A district bank president provided this example a few months ago.

(c) The order of things.

We cannot judge with precision how much further this level can decline without sparking ever greater upward pressures on wages and prices. But, should labor market conditions continue to tighten, there has to be some point at which the rise in nominal wages will start increasingly outpacing the gains in labor productivity, and prices inevitably will begin to accelerate.

The conditionality that G has laid out here says (again, at least to me) that the fact that labor market conditions are still tightening (see table above) is more important than the fact that the wage and price measures are not yet showing increases that policymakers think threatening.

Two hours of business television today -- any two hours -- confirms that plenty of market economists and analysts out there firmly believe that wages and prices can't turn the slightest bit threatening now simply because they haven't done so in the recent past.

And perhaps they can't. But given what the central bank's told us about its thinking, those market participants are on track to prove as incorrect about policy rates next year as they were this year.

Love a Loser

Combine all that with a cyclical-high percentage of

job-leavers -- the proportion of folks who are voluntarily leaving current jobs because they can demand (and get) higher-paying ones is now higher than it's been at any point since August 1990 -- and what do you get?

The November employment report may end up helping to delay the next tightening, but it certainly cannot have removed it entirely.