The U.S. jobs report for September, to be released Friday, will be affected by Hurricane Irma and, as a result, the data are unlikely to shed decisive light on developments in the underlying economy. Also, because the storm’s impact is expected to be both temporary and reversible, the report would have limited, if any, implications for policy, including the odds of a December rate hike by the Federal Reserve. Nonetheless, this may be a good opportunity to step back and ask more fundamental questions about one of the most watched economic reports, particularly as the usual commentary tends to focus on just two headline numbers.
The jobs report provides an important high-frequency feel for the state of the U.S. labor market, the consequences for consumption (the biggest component of gross domestic product, with domestic and international effects), and the implications for policies (both what is likely to occur and what should happen). Understandably, much focus tends to be on the pace of job creation and the unemployment rate, with spillovers for wages and the flow of job seekers in and out of the labor market.
More recently, however, there has been a breakdown in these relationships. Neither the rate of growth in wages nor the labor participation rate has responded well to the historic run of high job creation and to the decline in the unemployment rate to historically low levels. In addition, wages, in particular, have evolved into an indicator of a broader economic phenomenon that speaks directly to the notable level of social discontent and feeds into political polarization and the erosion of trust in institutions and expert opinion.
Since the recession, wages have increased at a rather muted pace that is well below what was predicted by historical estimates of the Phillips curve, which tracks the relationship between unemployment and wage growth. As a result, the more encouraging developments in the jobs report have not materially reduced the high degree of economic insecurity that comes with low-paying and insecure jobs, both actual and perceived. And, in the context of concern about the inequality trifecta of income, wealth and opportunity, this phenomenon contributes to societal divisions that fuel political polarization and erode trust in the system and those entrusted with leading it (politicians, bureaucrats and technocrats).
Many reasons have been put forward to explain economic insecurity and, while none dominates, most provide useful insights. They range, for example, from the residual trauma of the global financial crisis that delivered not just the recession but also the real threat of a multiyear depression, to the impact of other structural and secular factors such as technological innovation, globalization and the diminishing influence of labor unions. Policy slippages, including over-reliance on monetary policy and delays in adopting reforms that invigorate genuine drivers of high inclusive growth, are also relevant.
The hope is that, in the next few months, the jobs reports will show that wage growth is picking up as even more slack is taken out of the labor market. This could be amplified by progress on pro-growth measures that include tax reform, infrastructure, job retraining and retooling, better skill acquisition, educational reform and the like. In addition, it could encourage more discouraged workers to re-enter the labor force, providing an additional boost not only to actual but also potential growth. Better economic policymaking by Congress is likely to prove critical to turn such hopes into reality.
Mohamed El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He was chairman of the president’s Global Development Council, CEO and president of Harvard Management Company, managing director at Salomon Smith Barney and deputy director of the IMF. His books include “The Only Game in Town” and “When Markets Collide.”