What to Hope For in the November U.S. Jobs Report

(Bloomberg Opinion) -- One of the many casualties of the recent market turmoil could be the longstanding alignment of the economy, markets and the Federal Reserve when it came to the monthly employment report. Although the data for November, which will be released Friday, are likely to indicate a continuation of the robust job creation, there may be less alignment when it comes to wage growth. That possibility would make a third indicator — labor-force participation — even more consequential.

A year ago, when financial markets were strong and there were high hopes for a synchronized global pickup in growth, the trio of the economy, markets and central banks benefited from gains in both employment and wages. That optimism has been dashed by weaker and more volatile markets, as well as declining and more divergent growth. Now, with markets increasingly worried about the erosion of the “central bank put,” there is less unanimity on wages.

Higher pay benefits the economy in two ways. First, it supports stronger consumer demand, an important driver of growth and an encouragement to business investment. This would come as the Fed’s Beige Book, released Wednesday, pointed to “modest to moderate” growth, some waning optimism and a somewhat slowing economy. It would also occur as investors are paying more attention to yield inversion along parts of the U.S. yield curve.

In addition, faster wage growth would give an incentive to discouraged workers to reenter the labor market, benefiting production capacity. At the moment, the labor-participation rate (up 0.2 percentage points in October to 62.9 percent, but not much changed over a 12-month period), and the employment-population rate (at 60.6 percent), languish at relatively low historical levels.

For markets, stronger wage growth is now more of a two-sided issue: It supports higher corporate revenues, but at the cost of encouraging the Fed to go forward with a path of rate hikes that would be more aggressive than what’s currently priced by markets. Indeed, higher wage growth is a lot less straightforward for the central bank these days.

Earlier in the year, the prospects of robust job creation and a pickup in wages were seen as a friendly environment for further progress toward the “beautiful normalization” of monetary policy (that is, raising interest rates and gradually reducing the balance sheet without derailing growth or disrupting markets). But that would become more difficult if higher wages are now mainly a lagged response to past growth while prospects for the global economy are less bright.

Fortunately, there is a way to regain alignment: the possibility of an increase in labor participation.

It has been of concern that more people have not reentered the labor market despite a historically low unemployment rate (3.7 percent), along with existing vacancies (at 7 million, according to the latest JOLT survey) that exceed the number of unemployed (6.1 million). By highlighting potential structural rigidities, such as growing skill mismatches, the low participation rate could also be taken as a signal to the Fed that the U.S. is at full employment, which would fulfill one of the central bank’s two mandates.

Conversely, upward flexibility in the participation rate would be taken by the Fed as a sign of labor-market slack. That would benefit the supply side of the economy and counter the pressure for aggressive rate hikes.

Let’s hope the jobs report for November points to a higher labor-participation rate that enhances the possibility of a realignment of the economy, markets and the Fed. Let’s also hope this realignment is not achieved through the negative trifecta of sluggish job creation, slower wage growth and a decline in the participation rate. That would be bad for everyone.

To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. His books include “The Only Game in Town” and “When Markets Collide.”

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