Why the Fed is Flummoxed by the U.S. Labor Market

Policy Paper
Nov. 12, 2014

In the latest statement from the Federal Open Market Committee, Fed Chair Janet Yellen seemed to set aside some of her earlier concern about slack in the labor market and sounded a note of optimism that lower unemployment signaled a stronger economy. Yet, as Daniel Alpert, a founding member of the World Economic Roundtable, explains in his sobering review of America’s job market we should not take too much comfort from the recent fall in the headline unemployment rate.

Alpert highlights a number of worrying trends that suggest that we still need to be concerned about slack in the labor market:

  • The fall of unemployment to 5.9%, from a peak of 10% during the Great Recession, is largely a result of a decline in the Labor Force Participation Rate, which is at levels not seen since the early 1970’s
  • In 2014 while there was an improvement in the quality of jobs created with more new “high wage” jobs than new “low wage” jobs created, wages in “high wage” sectors actually stalled.
  • And while wages in low wage jobs did improve, the increase did not translate into an increase in aggregate disposable income because the increase in wages was offset by a decline in government support payments like the Earned Income Tax Credit and the Supplemental Nutrition Assistance Program.

As a result of these and other trends, Alpert argues that a decline in the unemployment rate is not resulting in wage increases and job creation is not translating into consumption growth.