On this Labor Day weekend, it would seem that working women and men should be celebrating. Businesses have expanded monthly payrolls for nearly seven years, the longest streak on record. The jobless rate has fallen to levels that economists call full employment. You would think America in 2017 is a worker’s paradise, to use Marxist phraseology.

The real world should disabuse one of any such notion, if last November’s election results haven’t already. What’s missing is the signal aspect of full employment: rising pay. As shown in August’s employment report, released on Friday morning, raises remain paltry.

Nonfarm payrolls rose by 156,000 last month, a bit short of economists’ 180,000 consensus guess, and the previous two months’ tallies were revised downward by 41,000. The jobless rate, which comes from a separate survey of households, ticked up to 4.4% from 4.3% in July, reflecting rounding as well as real changes.

Digging more deeply into the data, government payrolls were big reasons the top-line number was light. August numbers also have a propensity to be revised higher, which could reflect the difficulty in seasonally adjusting them, when the school year starts and public education workers are supposed to be counted in the Department of Labor’s survey.

As for the numbers’ other nitty-gritty, MFR’s chief U.S. economist, Joshua Shapiro, notes that the “birth-death” adjustment added 103,000 to the not-seasonally adjusted payrolls, which rose by only 51,000 positions overall. That was the second straight month this fudge factor helped to give a rosier hue to the adjusted figures, raising the alert about the otherwise strong data, he adds in a research note to clients.


But the key datum to emerge from the employment report was that average hourly earnings rose by just 0.1% in August, short of the 0.2% gain predicted, and less than July’s 0.3% blip. The workweek also shrank slightly, to 34.4 hours from 34.5 in the previous two months, which translates to smaller paychecks.

More importantly, the year-over-year increase in average hourly earnings remains stuck at just 2.5%, which essentially means that workers are barely keeping ahead of inflation. Therein lies the angst felt by so many. At the same time, it presents a conundrum to central banks, whose policies aim to produce a desired level of inflation, 2% being the magic number the solons have settled upon.

According to the theories in the textbooks that the academics have written, there should be an inverse relationship between joblessness and inflation. For those who snoozed through Paul Samuelson (or his successors, who similarly profiteered by the college guild’s requirement that their texts be acquired at great cost to students or their parents), the historical relationship described by economist A.W. Phillips six decades ago implies that pay gains should be ramping up.

Clearly that isn’t happening. Workers who should be doing swimmingly are treading water, if indeed they are keeping their heads above the waves. Other labor data also show record job openings, but employers aren’t paying up to fill those spots.


This conundrum of continued low inflation at a time of low unemployment yields one key outcome for investors. Interest rates remain historically low, which means that asset prices hover at historic highs. Yet the easy monetary policies that produced this low unemployment ought to have the opposite result—surging economic growth with rising inflation, just as Phillips’ data suggest.

BY NOW, IT IS FAR from original to point out technology’s impact on inflation. This column discussed the idea a few weeks back when Amazon.com (ticker: AMZN) announced its takeover of Whole Foods Markets (“Is the Federal Reserve Living in the Real World?” June 17). Last week, the grocery chain known as Whole Paycheck entered the Amazon fold, and prices promptly dropped.

The Bank Credit Analyst observes that a “culture of profound cost reduction” has gripped the business sector since the financial crisis. It’s not just Amazon, but an array of disrupters that have forced costs lower, including Uber Technologies, Airbnb, artificial intelligence, robotics, the “gig economy” of contract workers, and hydraulic fracturing, to name a few.

“Employees are less aggressive in their wage demands in a world where robots are threatening humans in a broadening array of industrial categories. Many feel lucky just to have a job,” BCA writes.


Even in workplaces where robots haven’t yet taken over, demographic forces are in play. Our friends at the Liscio Report point to a key factor that is all too apparent in the current workplace: the downward pressure on labor costs created by the replacement of highly paid older workers with younger, less-experienced, but cheaper, ones.

They cite the work of Conference Board economist Gad Levanon, who points to the Atlanta Fed data showing 3.3% wage growth for a constant set of workers, versus 2.5% for the overall hourly figure. The difference reflects “the retirement of baby boomers and their replacement by younger, lower-wage workers,” Liscio’s Doug Henwood and Philippa Dunne write.

There is another aspect for policy makers to consider. Contrary to the textbooks, expansionary monetary policies that push down interest rates and, in turn, raise asset prices may have an unexpected effect. While conventional theory says this boosts demand, raising wages and prices, current experience suggests that it also expands supply, depressing inflation.

Consider the energy sector, in which fracking has expanded U.S. oil supplies and pushed down prices. No more is the world held hostage by the Organization of Petroleum Exporting Countries, whose pricing power has been debilitated by fracking. But would that technology have expanded as vigorously without a vibrant high-yield bond market that provided low-cost funding?


Cheap capital (the flip side of high asset prices) has provided private equity with billions it eagerly invests in promising technologies, from cutting-edge medical treatments to disruptive enterprises that have Silicon Valley buzzing with innovation. To be sure, brilliant ideas would get funded even if interest rates were 10%. But how many more get financed when the Federal Reserve pegs the cost of overnight money at just over 1%?

That’s not to say that technology has magically solved inflation, especially from consumers’ standpoint. Health care and housing are sectors that have been affected less by technology.

MEASURING PRODUCTIVITY AND EFFICIENCY in health care is fraught with problems. How do you gauge the worth of a new cancer therapy that may save lives at a cost exceeding $400,000 a patient? And construction is particularly resistant to productivity-boosting innovations, as the Economist recently wrote and this column discussed several months ago (“Bitcoin and Tech Stocks: A 21st Century Tulipmania?” May 27). One suggestion for Houston about rebuilding after Hurricane Harvey: Emulate my clever Kiwi cousins, who used shipping containers as structures to rebuild Christchurch quickly after its devastating 2011 earthquake. However, innovative thinking is rare in the building trades.

In a MacroMavens missive last month, Stephanie Pomboy noted that the rising cost of health care and housing had accounted for 40% of the growth in consumer spending in the previous year. No wonder consumers have less left over for discretionary items, as retailers’ results suggest.

While holding down interest rates to try to boost inflation has had positive impacts, it has had side effects, as well. High asset prices benefit only those wealthy enough to have assets, while small savers get the thin gruel of interest rates of 1% or less on their savings. Private-equity investors feast on the most attractive opportunities, while shares of companies that recently have come public, such as Blue Apron (APRN) and Snap (SNAP), have fallen by half.


The probability that the Fed will raise rates again this year remains only about 33%. The central bank could, however, begin to pare its $4.4 trillion balance sheet after its policy-setting session later this month, but that could be put on hold if Congress fails to raise the debt ceiling or to provide funding for the government in the fiscal year starting on Oct. 1. However, Congress could attach spending for Hurricane Harvey relief to those fiscal measures, staving off a technical default or government shutdown.

Even if the Fed tightens policy through balance-sheet reductions or rate boosts in coming months, the European Central Bank and the Bank of Japan will continue to expand liquidity, which will seep into the global financial system. The dollar’s weakness and the euro’s rise toward $1.20 weigh against the ECB’s curtailing its bond purchases. Ditto the Bank of Japan, which similarly doesn’t want a stronger yen that hurts exports and tends to push down already too-low inflation.

All of which suggests continued low interest rates, a plus for stocks. Whether that achieves the Fed’s aim to lift inflation—and wages—is another question.

Email:randall.forsyth@barrons.com

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