There is no doubt the labor market is getting tighter. But it has yet to tighten to the point wages start picking up. For the Federal Reserve, that is a problem.
Defying expectations that stronger hiring would draw more of the population into the workforce, the unemployment rate—which only counts people as unemployed if they are actively looking for work—has fallen sharply this year, dropping to 5.8% in October from 6.7% in December. There is also more work to be had, with the Labor Department reporting Thursday that there were 4.7 million job openings at the end of September from 3.9 million in December. At 3.3%, the job-openings rate—openings as a share of filled and unfilled jobs—has reached prerecession levels.
Indeed, if the relationship between job openings and unemployment observed during the last economic expansion still held, the job-openings rate would imply an unemployment rate of about 4.4%. But that relationship—a downward-sloping line called the Beveridge curve, after the late economist William Beveridge—has changed since the recession.
Some economists worry that as a result of factors like unemployed workers lacking the skills for available jobs, the shift in the Beveridge curve is structural. Put another way, the Beveridge curve suggests employers now have as hard a time filling jobs with a 5.8% unemployment rate as they used to when unemployment was 4.4%.
Yet wages aren’t behaving as if the job market is close to tight. Average hourly earnings in October were up just 2% from a year earlier. Most economists think that with the job market continuing to improve, stronger wage gains are around the corner. As must the Fed, otherwise it wouldn’t be signaling it expects to start raising rates about the middle of next year.
Fed Chairwoman Janet Yellen has said wages need to be increasing 3% to 4% to generate the 2% inflation rate the central bank is targeting. With borrowing costs so low, the Fed won’t wait for those kinds of wage gains before raising rates.