Opinion: The Fed is not only misreading the “hot” labor market, it’s also following pre-21st century thinking.

Let’s start with the April employment numbers and then discuss why we believe the Fed is misusing this data to conduct its current monetary policy.

First, we saw another solid increase in payrolls last month, with employers adding an additional 428,000 workers. Such hiring has averaged nearly 519,000 a month since the start of the year, even though labor productivity itself has plunged in this first quarter to the most since 1947.

Ironically, despite this dismal productivity, average hourly earnings still managed to rise 5.5% last month, the second-largest annual increase in 14 months. The fact that pay has held up so well is interesting, especially as average weekly hours worked have been trending down since early 2021.

Overall, the survey of establishments shows labor market conditions continue to improve, with manufacturing jobs adding 55,000, and leisure and hospitality adding another 78,000 to payrolls last month.

Read: Fewer people are working in schools and local government than before the pandemic, but many are being hired by temp agencies

We expected to find at least some consistency in the household survey, but we didn’t quite get it. Here, the total number of employed people in the US actually plummeted by 353,000 last month, with 363,000 leaving the workforce altogether. Thanks to these two figures, the unemployment rate remained at 3.6%.

Plus: The only bad thing about the April jobs report might not be so bad after all

So what is it about the jobs numbers that raises new concerns about the current course of the Fed’s monetary tightening?

First, there seems to be a tendency for the Fed to pick and choose data points that essentially highlight the strength of the labor market to justify increasing the pace of monetary tightening. Whether that is a valid criticism or not is debatable. But as an economist, I must say that it always sounds strange to hear Fed Chairman Powell, or any government official, claim that the labor market is too strong. Or, as Powell put it, today’s job market is “too hot,” even “unsustainably hot.”

It sounds terribly strange. Policymakers generally strive to create a backdrop that maximizes employment. With more people at work, the less the government spends on unemployment benefits, the larger the tax base, and there is extensive research showing that low unemployment also reduces crime. It’s a win-win situation.

However, the Federal Reserve today sees the exceptional strength of the labor market as a major source of inflation and therefore needs to be controlled with higher interest rates.

But the villain here is not the strength of American hiring. If anything, we see strong jobs growth as a way to help increase output of goods and services and thus cool inflationary pressures.

Look, we understand the Fed’s reasoning. Companies are competing fiercely to fill some 11.5 million job openings at a time when fewer than 6 million people are unemployed and actively looking for work. Fed economists worry that efforts to attract this limited pool of jobless workers and retain existing ones will continue to drive up wages, forcing employers to pass on higher labor costs to consumers. The subsequent jump in the cost of living would cause employees to demand even more wage increases and, in the process, trigger what the Fed fears most: a destructive spiral of wages and prices.

So it depends on how you see the villain in this inflation story. Should we slow down the economy and reduce price pressures by suppressing job creation? We don’t think so. Technology, robotics, AI, and cyber security have helped create millions of new jobs to help the economy run much more efficiently.

The real villain is that we don’t have adequate policies to increase the supply of qualified workers.

For example, we find it strange that the Fed would signal an overheated labor market when April’s labor force participation rate of 62.2% is still down from the 63.4% we saw before the start of the pandemic (Feb. 2020). Or, for that matter, when the employment rate of the population last month fell to 60%, down from 61.2% in February 2020. Do these latest figures that still show a huge job shortage really reflect a market overheated workplace?

And it also seems strange to us why annual wage increases of 5.5% are so alarming for the Federal Reserve when even the level is insufficient to keep pace with inflation. The erosion of household purchasing power should cool overall demand in the economy.

Frankly, the percentage growth in real personal consumption expenditures in the first quarter was really no different than in the years before the pandemic!

Ah, you might reply that that is precisely the problem. Consumer spending may not have changed much, but the fallout from COVID-19, the war in Ukraine, and the closures of major cities and ports in China to combat COVID have led to global shortages of basic goods. Therefore, domestic demand chases fewer supplies and drives up prices.

We get it, but the Fed has little control over the latter. For the Federal Reserve to aggressively raise rates and thus subvert job creation and wage growth just to keep domestic spending in better balance with global supplies looks like something pre-21.St. economy of the century and a certain path to recession.

The two points we are highlighting are the following: First, the labor market does not appear to be as “hot” as Powell claims, and any effort to restrict its growth would only restrict the kind of domestic production that can help offset commodity shortages. goods.

Second, if you want to increase the supply of labor, Congress needs to take a more active role in relaxing immigration (e.g. H2B visas) and allocate more funds and/or tax credits to make it easier for Americans to retrain. unemployed so they can acquire the skills that are in demand these days, whether it be for software engineers or truck drivers.

The strong job market should be viewed as an asset to the US economy, not a liability.

Bernard Baumohl is chief global economist at The Economic Outlook Group in Princeton, NJ.

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