Why does job growth continue to 'surprise' us?

05 June 2023

The president signed, over the weekend, legislation that would lift the cap on borrowing just shy of the deadline, after which the United States would have defaulted on its debt for the first time. The drama took attention away from the latest jobs report released Friday. Firms added nearly 440,000 jobs in May.

It “marked the 29th straight month of job growth, according to data released Friday by the Bureau of Labor Statistics,” reported the Post’s Lauren Kaori Gurley. “Despite some slowing, the labor market continues to buoy the US economy through enormous uncertainty.” She added: “Economists had predicted a much smaller number of jobs created in May — around 180,000.”

The impact of the latest jobs report is an occasion for a fresh observation (I hope) – that the further we get into recovering from a deadly once-a-century plague, the less people who know what they are talking about expect it to keep going. The less they expect it to keep going, the more these same people, who are supposed to know what they are talking about, are surprised when it does.

In recent months, jobs reports I have seen have been accompanied by some variation of the word “surprise” – as in job growth continues to be “surprising” or “unexpected.” It continues to “defy predictions.” Or, my favorite bit of bureaucratese, it continues to “exceed data analysts’ economic forecasts.”

I don’t know any more about economics than you do. I don’t want to misrepresent myself. But I do know that things change over time and that our thinking about things has to change along with them. If our thinking does not change, we won’t understand what’s happening now. We will be thinking about how things worked in the past, but not how they are working in the present.

In the past (specifically, the 1970s), the thinking was that high prices caused recession. High prices hurt economically, ergo they hurt politically. Ask some of these people who are supposed to know what they are talking about why Jimmy Carter was a one-term president, and they will likely tell you: inflation.

The Federal Reserve has two equal mandates: prices and jobs. Since the 1970s, however, prices have been the priority. Back then, as it’s doing now, the Fed raised interest rates in response to rising prices. Raising interest rates caused firms to hire less or even lay off workers. This was not an accident. This was intentional. The point was pushing workers onto the unemployment line.

Why? Because, back then, the thinking was that the cost of labor was causing everything to cost more. Stop labor costs from rising and you’ll stop the cost of everything else from rising, too. To do that, the Fed kept raising interest rates.

It wasn’t always like this. Before 1980, the federal government used other tools, in particular something called “price controls” that targeted products deemed to be in the national interest, such as gasoline. But since the 1970s, “price controls” have been demonized as communism. To my knowledge, no president since the 1980s has talked seriously about revisiting the use of price controls.

You’ll notice that the Federal Reserve has been raising interest rates. You’ll also notice that firms are not hiring less or laying off more. (Layoffs in the tech sector are the exception, but people who know what they are talking about say that the impact will likely stay in that sector of the economy.) There have been two and a half years of job growth even as interest rates have kept going up.

You’ll notice, too, that the financial press keeps talking about jobs and the economy as if two and a half years of job growth were not supposed to have happened in the face of rising interest rates. Matter of fact, the way they tell the story, we were supposed to be in a recession months ago. Yet here we are.

They also keep putting jobs and prices at odds. Here’s Bloomberg News, after the “surprising” monthly jobs report was released on Friday: “When (and how) will central banks declare some measure of victory over price surges and stop (or even reverse) more than a year of [interest rate] tightening? The Federal Reserve says it’s notched some progress and that the US economy is cooling down. But the job market hasn’t cracked, with payrolls still surging” (my italics).

I don’t know any more about you than you do. What I do know is that things change over time and that our thinking must change along with them. Right now, the thinking is that jobs, not prices, are the problem. Right now, the solution has been that raising interest rates would solve the problem. It’s not solving the problem, though. I suggest it’s because our thinking is outdated.

Perhaps prices are the problem, not jobs.

If we updated our thinking, perhaps we’d no longer be so surprised.

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