Is Rapid Job Growth a Good Thing?

Yes, ceteris paribus. So how can we explain this:

In an interview with the Financial Times, Gita Gopinath, the fund’s second-in-command, urged the US central bank to press ahead with rate rises this year despite a recent moderation in headline inflation following one of the most aggressive tightening campaigns in the Fed’s history.

“If you see the indicators in the labour market and if you look at very sticky components of inflation like services inflation, I think it’s clear that we haven’t turned the corner yet on inflation,” she said, adding that the fund’s advice to the Fed was to “stay the course”. . . .

Chief among Gopinath’s concerns is the continued resilience of the US labour market, which as of the most recent data added on average roughly 400,000 jobs each month in 2022. The unemployment rate still hovers near historic lows and an acute worker shortage has helped to push wage increases to a level that is far too high for the Fed to hit its 2 per cent inflation target.

Policymakers may warn about excessive job growth and the financial markets occasionally react negatively to a strong jobs figure. So what’s going on here?

Consider the following facts:

1. A strong labor market is a good thing, other things being equal. Thus for any given rate of NGDP growth, more jobs is generally a good thing.

2.  In the very short run, job growth and NGDP growth are highly correlated.

3.  Jobs data comes out a few days after the end of each month. NGDP data comes out four weeks after the end of each quarter. Thus jobs data is far more timely.

4.  A stable macroeconomy requires slow and steady NGDP growth.

5.  Over the past year, NGDP growth has been wildly excessive. Money has been far too easy.

When the financial markets react negatively to a strong jobs figure, they are not indicating a preference for a weak labor market. Indeed, during periods when NGDP growth is too weak for a healthy economy, markets will often react positively to a strong jobs figure. Rather the markets are taking the jobs figure as an indicator of the current growth rate of NGDP. The resulting movement in asset prices thus reflects the market’s view as to whether NGDP growth is inappropriately weak or strong.  

You might object that in the long run there is almost no correlation between NGDP growth and jobs growth. Money is approximately neutral in the long run. That’s true, but in the short run the growth rates of employment and NGDP are highly correlated and the jobs data is available in a much more timely fashion.  

P.S. After writing this post, I noticed that stocks rose this morning after a strong jobs report. But the actual reason for the rise in stock prices was not the jobs figure, it was the unexpected slowdown in nominal wage growth, an indication of easing inflation pressure.