The United States’ unemployment claims have exceeded analysis’ forecasts. For those steering the nation’s monetary policy it is a great indication of economic health. Leading up to Janet Yellen’s speech later today, we take a look at the capacity of the labour participation rate and the extent by which government policy can pull the remaining population into the labour force.
As the effects of the Great Recession loosens its grip over the U.S. labour market, the two main questions on many analysts minds are; has the labour market plateaued, reaching ‘full employment’? Or, are there additional people who could still be pulled back into the workforce? With the unemployment rate at 4.8%, an increasing number of Federal Reserve officials are lobbying for a rate hike to happen sooner rather than later. But is the U.S economy ready?
As the long term trend of sub-par labour participation eases, we can see individuals returning to the labour market as a result of increased wages and more employment opportunities. As a result of this, analysts are divided on the impact of keeping interest rates as they are. Some argue that with unemployment so low, inflation may ensue, which may force the Fed to hastily raise rates. While on the surface, this argument may seem compelling, within the ambit of inflation, the U.S. has lagged behind targets – inflation continues to hover below 2%. Moreover, according to statistics, the labour force participation rate still remains somewhat depressed, with able individuals still remaining outside of the workforce. The strength of the labour market has been paramount to the recovery of the U.S. economy, a rate hike may tamper with job growth, unsteadying economic recovery and alienating the remaining labour market slack.
However, monetary policy does not stand-alone as a tool used to shape the labour force market. Fiscal policy cannot be ignored in the battle to increase labour participation. Policy makers need to focus on healthcare policy and childcare subsidies, which at present, are huge barriers to entering the labour force in the U.S. A fate left behind, in part, by the failure of trade unions to take a hold on the nation.
A November rate hike seems to be highly unlikely. The recovery of the U.S. economy is in its infancy. Nursing this rebound with low interest rates for as long as possible is the Fed’s best option for prolonged stability. In December, perhaps?