A jobs survey full of good news for the economy

For as long as I’ve been paying attention to economic news, pundits and investors have waited anxiously for the monthly report by the Bureau of Labor Statistics on employment situation. That’s still true, and there was some important news in Friday’s report. More on that later.

But the Oct. 4 report from the bureau was a real eye-opener. It was, in particular, the best news about inflation we’ve seen in a long time — even though it never mentioned inflation. The Job Offerings and Labor Turnover Survey ( JOLTS) asks employers how many unfilled positions they have, how many workers have quit or been fired and so on. It may seem obvious that this data is useful, but many economists believe that it’s even more so.

Some background: Standard macroeconomics relies on an updated version of the Phillips curve. The original version of that theory asserted that there was a downward-sloping relationship between unemployment and inflation: The higher the jobless rate, the lower the inflation rate, all else being equal. Since the 1970s, almost everyone has assumed that expectations of inflation also play a big role. If the public expects a lot of inflation, as it did at the end of the 1970s, this will push up actual inflation for any given rate of unemployment.

So what explains the recent surge in inflation? The mystery is that while unemployment is low, it’s roughly the same as it was on the eve of the pandemic, yet inflation is much higher. This is true even if you focus on “core” inflation, which excludes volatile food and energy prices.

What many economists suggest, instead, is that the unemployment rate is an inadequate measure of how hot the economy is running. And some argue that the best measure is the so-called Beveridge curve: the ratio of vacancies to the number of unemployed workers. This is the basis of a recent paper by Laurence Ball, Daniel Leigh and Pankaj Mishra that offers a pessimistic take on inflation based on the fact that the vacancy-to-unemployment ratio is high, even though unemployment isn’t all that low.

Another recent paper, by Olivier Blanchard, Alex Domash and Larry Summers, showed that this summer, the relationship between unemployment and vacancies had deteriorated, which they argued implied that the jobless rate consistent with stable inflation is now well above its current level — 5% versus its current 3.5%.

But then came the latest JOLTS report, which showed a large drop in job offerings in August, even though unemployment didn’t rise significantly.

Until August, vacancies were higher than pre-pandemic experience suggested they should be for any given rate of unemployment.

Until recently, it looked as if restoring the pre-pandemic vacancy ratio would indeed require something like 5% unemployment. It’s only one month’s data, but August suggests that the trade-offs may be improving as the economy recovers. A high jobless rate may not be necessary after all. I can’t resist pointing out that Blanchard et al declared, in July, that “it is highly unlikely that the [required] decrease in the vacancy rate can be achieved without a substantial increase in the unemployment rate.” But that’s exactly what seems to be happening. In fact, over 40% of the apparent excess in vacancies has vanished, with no significant rise in unemployment.

But wage increases have been slowing. Over the past three months, wages have risen at an annual rate of 4.4%, compared with 3.1% in the last three months of 2019. That suggests some excess underlying inflation, but not all that much.

So we got a JOLTS of good news. And yes, it adds to the case that the Fed is behind the curve on its fight against inflation.