Janet Yellen And Barack Obama’s Economy Is Looking Good

11/28/2017 05:06 am ET Updated Nov 28, 2017
JIM YOUNG via Getty Images

As Congress debates plans to give even more money to the country’s richest people, it is worth briefly recounting where the economy is now, before we feel the effects of any tax plan. Basically, it is a pretty good story.

The overall unemployment rate for October was 4.1 percent. This is the lowest unemployment rate since 2000. And that was an extraordinarily good year for the labor market. We would have to go back to 1970 to find the last time the unemployment rate had been this low.

The unemployment rate for African Americans was 7.5 percent in October. The 7.0 percent level reached in September ties for the lowest figure on record. While these levels of unemployment are still unacceptably high, they are an enormous improvement from the near 17.0 percent rate hit at the low point of the downturn in 2010. The 4.8 percent rate reported for Hispanics in October is also the lowest on record.

The good news on the unemployment rate must be qualified given the large number of people who have left the labor market. If we look at the employment rate (EPOP), the percent of people who are employed, it is still down for prime age workers (ages 25 to 54) by 1.5 percentage points from its pre-recession peak and by 3.1 percentage points from the high hit in 2000.

The decline took place for both men and women. This undermines the effort to blame the drop in EPOPs on problems specific to men that affect their ability and/or desire to work. Still EPOPS have been moving in the right direction as the labor market tightens. In the last two years the EPOP for prime age workers has risen by 1.5 percentage points, raising the possibility that we can at least get back to the pre-recession levels, if not the 2000 peak, assuming the recovery continues.

In addition to the gains in employment, we are also seeing wage growth that benefits those at the middle and bottom of the wage distribution. The median real weekly earnings of full time workers has risen by almost 5.0 percent over the last three years. This is after adjusting for the effects of inflation. The same is true for those further down the wage distribution at the cutoff for the bottom decile.

We get a similar story looking at the situation of the less-educated workers who have generally not fared way in the economy over the last four decades. The real median hourly pay for prime age men with a high school degree or less has risen by 3.0 percent over the last two years. For women with a high school degree or less the median hourly pay has risen 2.0 percent over the last two years.

While most workers had not been getting their share of the gains from growth since the downturn in 2001, one of the factors limiting wage growth in recent years has been weak productivity growth. We can and should have some redistribution from profits and high end earners to ordinary workers, however in the long-run wage growth cannot exceed productivity growth.

The economy has done very poorly on this measure in recent years with productivity growth averaging less than 1.0 percent annually over the last five years. This compares to a nearly 3.0 percent growth rate in the years from 1995 to 2005 and the long Golden Age from 1947 to 1973.

But there may be some good news here as well. Productivity rose at a 3.1 percent annual rate in the third quarter and it is set to increase at more than a 2.0 percent rate for the fourth quarter based on the most recent projections.

Productivity numbers are highly erratic, so it is much too soon to break out the champagne, but there is a plausible story whereby tighter labor markets may be the driving force in more rapid productivity growth. When the labor market becomes tight, and makes labor more expensive, employers have more reason to seek productivity gains.

This means that the least productive jobs are likely to go unfilled (e.g. greeters at Walmart or the midnight shift at a convenience store). Also, businesses will look for ways to get things done with fewer workers. If a tight labor market is driving this quest for productivity growth, then we would have a formula for low unemployment and sustained rapid wage growth.

To say that things are going in the right direction now doesn’t mean they are good. We have a long way to go to make up for the pain from the Great Recession. We will have to go considerably further if we want to reverse the upward redistribution of the prior three decades.

But is important that people recognize that the economy is going in the right direction for now. This is the economy that Janet Yellen and Barack Obama’s policies gave us. We will have to see what the impact of the new regime’s policy will be.