Tuesday, December 15, 2015

CONYERS: The Federal Reserve Should Let Jobs and Wages Grow

By John Conyers, Jr.

Dean of the U.S. House
of Representatives
John Conyers, Jr.
The Federal Reserve is widely expected to raise the federal funds interest rate from the near-zero levels in force since December 2008. With the headline unemployment rate at 5 percent, many Fed officials are declaring that we are near full employment, and will therefore act to slow the economy for the first time in 7 years. 

This would be a mistake. Our jobs recovery remains incomplete. 

In 1977, Congress tasked the Federal Reserve with the "dual mandate" of pursuing "maximum" employment and low inflation. But fighting potential inflation--the top priority of inflation hawks at the Fed--comes at the expense of jobs and wages. Raising interest rates dampens economic demand with the goal of impairing the job market and undermining workers' ability to seek higher pay or better benefits (what Wall Street executives refer to as "wage inflation"). If the Fed raises interest rates for the first time since the Great Recession, they will effectively be declaring "mission accomplished" on jobs and wages.

But there is a major issue: The data simply does not support a rate hike. Inflation remains well below the Fed's target of 2 percent (a target that many leading economists already say is too low). Meanwhile, tens of millions of workers are struggling to find good jobs. Over 6 million Americans are working part-time because they can't find a full-time gig. Arguably the most important indicator, the prime-age employment-to-population ratio (the share of adults ages 25 to 54 who have a job) has recovered less than half of its drop from the Great Recession. This means that over 4 million would-be workers have given up looking for work, and are not even counted as unemployed. And one figure that Fed Chair Janet Yellen is known to watch carefully--the quits rate, or the percentage of workers willing to leave their job, has remained essentially unchanged all year. At year's end, the quits rate is still 9.2 percent lower than it was before the recession, indicating that many workers are stuck in jobs that they would leave if they could. This makes sense, because with 1.5 unemployed workers for every job opening, one-third of those currently unemployed will not be able to find a job no matter how hard they search. 

Wage growth has been sluggish, with workers unable to earn their share of what was lost in the recession, and November's jobs report showed that it slowed to a crawl for many workers. With a minimum wage that is lower in real terms than it was in 1968, and millions of Americans still seeking work, the Fed should not slow job creation and wage growth absent clear evidence of inflation. 

Workers of color have the most to lose from a premature rate increase. The African-American unemployment rate is more than double the rate for whites, with many urban pockets--such as my hometown of Detroit--faring even worse. But letting the economy reach full employment holds some answers: For every 1 percent reduction in the national unemployment rate, African-Americans see a nearly 2 percent reduction. When the unemployment rate dropped to 4 percent in the late 1990s, the black unemployment rate fell to 7.6 percent, the lowest rate on record and the closest it has ever been to the white rate during an economic expansion. An unsubstantiated rate increase will again raise questions about the Fed's commitment to ensuring that our disadvantaged populations can experience the American Dream of earning a living.

If the Fed does rush to raise rates, it would not be the first time that our central bank valued Wall Street's inflation jitters over the livelihoods of American workers. Since 1980, the economy of the United States has operated below full employment 70 percent of the time, according to the Congressional Budget Office's official estimate of full employment. This is perhaps unsurprising, considering that Fed policymakers almost exclusively come from the financial industry and tend to be far more concerned about inflation than working Americans. 

To correct this imbalance, I introduced H.R. 3541, "The Full Employment Federal Reserve Act," which instructs the Fed to target a 4 percent unemployment rate. Even if it is not immediately passed by Congress, Fed officials should follow the lessons from the late 1990s that inspired my bill. At the time, then-Fed Chair Alan Greenspan was facing the same pressure from banks and inflation hawks to raise rates that Yellen is facing today. Greenspan, however, refused to go along, and the unemployment rate dropped all the way down to 4 percent as a year-round average for 2000. This meant that millions of Americans were able to get jobs and wage increases a rate increase would have denied them.

Despite causing the Great Recession, Wall Street got bailed out. Congress then failed to enact meaningful job creation legislation (such as my New Deal-style jobs bill, H.R. 1000) to bail out working Americans. Will the Fed now heed our workers and allow jobs and wages to grow? Will they look at the reams of data showing that the job market remains damaged from the recession? Or will they pull the rug out from under the recovery, setting a troubling precedent by slowing the economy before it's ready? We find out on Wednesday.

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