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Sunday, June 13, 2021

Here’s Why the Fed Isn’t Frightened by the Jobs Report

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Employers are struggling to find workers, and that will push up labor costs, leading the Federal Reserve to raise rates much sooner than it expects to.

Oh, please.

The Labor Department on Friday reported that the economy added a seasonally adjusted 559,000 jobs last month. That big number counted as a mild disappointment in comparison with the 671,000 economists polled by The Wall Street Journal expected. Coming on top of April’s weaker-than-expected report, it adds to evidence that businesses are having a hard time staffing up.

There are many possible reasons why, and many probably are occurring at once. An incomplete list: Difficulty obtaining child care, extended unemployment benefits that make lower-wage jobs less attractive, continued worries about Covid-19 and a pandemic-related shift in perceptions about what work is worthwhile. They all come down to incentives against working. The way for employers to overcome them is to raise the incentives for working, most obviously through wages.

There is some evidence that is beginning to happen. The employment report showed that average hourly earnings rose 0.5% from a month earlier, topping the 0.2% gain economists expected. That is particularly impressive since the biggest job gains were in the leisure and hospitality sector—lower-paying jobs that tend to put downward pressure on the average wage figure.

The obvious worry is that rising wages could lead businesses to raise prices, leading workers to demand even higher wages and creating inflationary pressures that the Fed would need to fight back against. But let’s not get ahead of ourselves.

For starters, there were 7.6 million fewer jobs in May than before the pandemic hit. Adjust for population growth and that hole deepens to about 9 million. The Fed’s mandate calls for it to bring the country to full employment. Tapping the brakes now would go against that.

Second, many difficulties businesses face finding workers will probably subside within months. Schools will be back to in-person learning in the fall and enhanced unemployment benefits will end in September, while increased vaccination and falling Covid-19 cases should make people more comfortable returning to work.

Finally, the Fed wants to get wages running higher. It actually needs them to if it is ever going to meet its goal of inflation running at 2% over the long term, and perhaps also because it would like to see labor get back some of the share of national income that it has lost in recent decades.

The Fed’s probable course remains that sometime this summer it will start talking about reducing asset purchases and that some time after that it will begin the monthslong process of bringing them down to zero. After that it will finally begin to gradually raise rates. There are things that could change that, like employment recovering surprisingly quickly, but grumbling about how hard it is to hire a dishwasher isn’t one of them.

Write to Justin Lahart at justin.lahart@wsj.com

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