More contrarian analysis from my third favorite economist

Gary Shilling: U.S. Labor Over Supply

The Fed worries that the current 4.4 percent unemployment rate means that labor markets are too tight, but it also worried about a much higher rate back in December 2012. The central bank stated then that the federal funds rate, then in the zero-to-0.25-percent range, would be “appropriate at least as long as the unemployment rate remains above 6.5 percent, inflation one and two years ahead is projected to be no more than a half percentage point above the [policy] Committee’s 2 percent long run goal and long-term inflation expectations continue to be well anchored.”

But the Fed had to abandon that unemployment target as this very poor measure of labor market conditions fell, not so much due to increased employment but mainly because fewer people were looking for work. Youths stayed in school in hopes that more education would improve their job prospects, and many middle-aged people, discouraged over poor job prospects, discontinued their search for employment.

The many dropouts may well be drawn back to work as opportunities expand. Indeed, the labor force of those age 20 to 29 has been growing since 2012. At the same time, people over 65 who are employed or actively looking has been rising since the early 1990s. Many seniors are in good health and prefer active work to vegetating in front of the TV. Others, among them many postwar babies born in the 1946-1964 years, have been notoriously poor savers throughout their lives and need to keep working due to a lack of retirement assets.

As a result, the total labor participation rate appears to have bottomed. From September 2015 to this June, it rose from 62.4 percent to 62.8 percent. The growth in the working-age population will provide ample people to fill available jobs, even if economic growth accelerates from the recent average of 2.1 percent to my forecast of 3 percent to 3.5 percent -- assuming they have the needed skills.

Also, keep in mind that, like capacity utilization data measures of labor market slack on a global basis aren’t available. It certainly appears, however, to be ample, and the skills of workers in Asia are rising rapidly, not only in the production of goods but in services as well.

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