March 7 (Bloomberg) -- It's that time of the month again when the market's fancy turns to employment.
I'm not sure why. This expansion has been characterized by no extension of the work week -- generally the first line of defense when demand picks up -- and only so-so gains in employment. Monthly non-farm job growth has averaged 170,000 over the past two years.
The first Friday of the month (occasionally the second) has failed to produce any fireworks. After a while, you stop hoping.
Still, employment remains the marquee economic report, with wide-ranging implications for other statistics -- personal income and industrial production, to name two. So you have to pay attention.
When I tuned in this month in advance of Friday's report on the labor market in February, I was surprised to learn that the labor market was tight. First there were no jobs, then no good jobs, then all the good jobs were going to China. How did we go from there to here? Where's the evidence the labor market is tight?
``You don't see the symptoms, and that's one of the puzzles of the moment,'' says Neal Soss, chief economist at Credit Suisse.
Let's take a look at the evidence of what the Federal Reserve euphemistically refers to as ``increases in resource utilization,'' which has become the raison d'etre for raising short-term rates.
Still Looking for NAIRU
Exhibit A: The unemployment rate
When Fed policy makers talk about resource utilization in today's produce-it-where-it's-cheapest world, they aren't talking about the industry operating rate, which stood at 80.9 percent in January, a touch below the 33-year average.
What they're referring to is the unemployment rate, which dipped to a 4 1/2-year low of 4.7 percent in January, down from a cycle peak of 6.3 percent in June 2003. According to Phillips curve theory, when the unemployment rate falls below some arbitrary level, or NAIRU (non-accelerating inflation rate of unemployment), inflation accelerates.
The fact that the U.S. economy experienced high unemployment and inflation simultaneously in the 1970s and low unemployment and inflation in the 1980s has done nothing to deter NAIRU advocates.
Preference for Leisure
``To the extent that a Phillips curve exists, it's a moveable feast,'' Soss says.
When presented with a patient with a decent looking MRI and bad pain, doctors are fond of saying they don't treat X-rays; they treat patients. Maybe the dismal science could learn a lesson or two from medical science.
Exhibit B: The average workweek
The average workweek has been flatlining for 3 1/2 years at 33.6 to 33.8 hours. That's well below the average of 34.3 hours in the 1990s, 34.8 hours in the 1980s and 36.3 hours in the 1970s -- all decades that had their share of workweek-depressing recessions.
American's increased preference for leisure notwithstanding -- the workweek has been declining since the 1960s -- if the labor market is tight, why aren't companies asking their current employees to sit at their desks a half-hour longer every week?
It's a lot easier -- and cheaper -- to crack the whip on the current stable of workers than find and retain new ones. It's not happening, so maybe there isn't enough work to warrant it.
Labor's Share
Exhibit C: Wages
Recently there's been growing agitation over the increase in the narrow measure of wages in the employment report. Average hourly earnings rose 3.3 percent in January from a year earlier, barely ahead of the 3.1 percent gain in the personal consumption expenditures price index.
Looking at broader measures of compensation (wages, salaries and benefits), labor doesn't seem to be getting much traction.
``Bargaining power has shifted to the capitalists,'' Soss says. ``Corporations have taken away pension plans and given employees 401(k)s. They've taken their health benefits and given them medical savings accounts. They've transferred the risk from capitalist to worker and don't have to compensate him.''
Labor's share of the income pie was 57.4 percent last year, up from 56.7 percent at the 1997 trough but well below the 1980 peak (61.1 percent), according to Soss.
Asymptomatic Tightness
``It's one thing to have a preconceived notion of full employment,'' says Jim Glassman, senior U.S. economist at JPMorgan Chase & Co. ``But you have to look to prices for validation.''
If the labor market were tight, wouldn't workers be getting a better shake?
Exhibit D: The participation rate
The percentage of the population that is in the labor force (employed or unemployed) has been drifting lower since its peak in the first quarter of 2000 (66.9 percent). There's a good chance the turn-of-the-century high represents some kind of a bubble, which was bound to burst with technology and Internet stocks.
It may seem like a distant memory, but companies were offering cars and other expensive perks to attract skilled workers in the late 1990s. Fast-food restaurants, such as McDonalds, expanded their potential hiring pool to non-English- speaking, entry-level workers by using icons on cashiers' screens. Criminals were lured into the workforce because work paid better -- and was a lot safer -- than crime.
Not Tight Enough?
Everyone has a price at which work becomes more attractive than leisure. The fact that labor market conditions haven't lured folks back into the workforce tells you the price is still too low.
The increase in resource utilization has figured prominently in the statement released at the end of the Fed's December and January meetings. Unless the adverse effects of the tight labor market surface soon, policy makers may have to find another justification for raising rates.
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