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Mohamed A. El-Erian Headshot

The Policy Absurdity of the Monthly Jobs Report

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There is one thing worse than addressing a problem with imperfect solutions. It is not addressing the problem when better solutions are available. Yet this is what seems to happen every month in reaction to the highly-watched employment report.

This morning's data confirmed the central message of prior monthly reports: the jobs picture is improving, but not fast enough given the damage created by the Great Recession -- especially for those of us who worry about unemployment problems getting structurally embedded into the economic system and, thus, becoming even much harder to solve.

According to this morning's report from the U.S. Bureau of Labor Statistics, 175,000 jobs were created in May -- a solid but not great number. Private sector jobs growth amounted to 178,000, with gains in professional and business services, food, retail and health care. Government jobs declined by 3,000.

Some of the major components of the employment report are still flashing yellow. Average hourly earnings were essentially flat in May while unemployment ticked up to 7.6%.

Even more worrisome, there are still 4.4 million Americans that are long-term unemployed, the teenage joblessness rate is stuck at 24.5%, and the employment-education gap speaks to the more general problem of excessive income and wealth inequalities (the unemployment rate for those with a bachelor's degree is 3.8% compared to 11.1% for those with less than a high school diploma).

Another notable issue pertains to the pattern of reactions. It is not changing fast enough in order to improve future employment reports.

Three elements are particularly noteworthy.

First, the numbers have been, and remain a direct input for Federal Reserve policy deliberations -- particularly how it should continue supporting the economy using highly experimental (and invariably imperfect) tools.

Today's numbers will cause the Fed to think again about its desire to taper its buying of securities -- and this despite the fact that central bankers are increasingly recognizing that the hoped-for "benefits" of unconventional measures come with "costs and risks" (that is, collateral damage and unintended consequences) -- in other words, they are stuck with imperfect policy tools.

Second, financial markets are obsessed with the monthly numbers because they speak to how Fed policy is influenced by such data. Remember, the central bank's highly-experimental actions have inserted a significant wedge, disconnecting sluggish fundamentals from more buoyant asset prices (at least until recently).

But market reactions are no longer as predictable. Developments in the last couple of weeks, including Japan's massive volatility, have started to shake some investors' unquestioned faith in the power and effectiveness of central banks.

Third, the reactions of the Fed and markets stand in sharp contrast to what happens on Capitol Hill.

For Congress, the monthly jobs report does not really serve as an input into policymaking. This is unfortunate and frustrating on two counts: the United States still faces an unemployment problem notwithstanding the steady improvement of the last couple of years; and Congress is in a position to deploy many better tools than the one being used by the Federal Reserve.

This does not mean that there are no responses on Capitol Hill. There are, but they focus on political statements rather than policy actions.

In the next few hours, politicians from both parties will take to the air to comment on this morning's numbers and use them to undermine those on the other side of the aisle. What we will not hear, however, is a much needed and detailed call to action. And this amplifies the worries that some of us have about the extent to which joblessness is getting embedded in the structure of the economy, rendering the subsequent solutions even more difficult.