There are currently two rates that are very different from what you might expect: unemployment and wage growth.
This morning CBS announced that unemployment was 3.2 percent in August. That is a remarkably low percentage for a country that has just emerged from an unforeseen and severe economic crisis. Now that the NOW scheme is ending and bankruptcies will rise somewhat, the unemployment rate will rise somewhat, but it is now going so well that it can remain below 4 percent in 2022.
The collective labor agreement wage increases are also going well: they are again above 2 percent per year. Also in the estimate of the CPB, which does not take future policy changes into account. Should the minimum wage be raised or the labor market reformed, two policy changes that are driving wage growth, there will be more to come. Towards the 3 percent in 2023? That wouldn’t surprise me anymore.
Both developments are driven by the state and the market. The NOW scheme has kept unemployment low and ensured that it cannot rise too much in 2022. The staff shortages, also known as labor market shortages, are related to this. Due to the NOW there were fewer job seekers than would otherwise be the case. And now that the NOW ends, the labor market tightness is back to the level of 2019. And if there is anything that correlates with wage growth, it is tight.
This ingenious interplay of state and market is not ideal, but much better than in the recovery periods after other crises.
It is difficult to define an ideal unemployment rate. Many people are unemployed for good reason. Think of informal care or a few months of rest between one job and another.
Ideal wage growth is above 3 percent. Wages should rise slightly faster than average economic growth in order to reduce income inequality between employees on the one hand and entrepreneurs and investors on the other. Once that inequality has been reduced to a point that most people find acceptable, wage growth can begin to keep pace with economic growth.
Yet the glass is half full. Don’t let the fact that we’re not above 3 percent yet stop you from celebrating the success of the moment.
In the recovery after the previous economic crisis, that of 2008/2009, we had to deal with very different percentages. Collective labor agreement wage growth was below 2 percent for no less than eight years. Unemployment was above 5 percent for seven years. Very unhealthy, because in the years after a crisis you want households to do well. They need work and wage growth to boost recovery.
This time it is different and the NOW has made a strong contribution to that. We must learn from this in order to make subsequent government interventions even more successful. The conclusion could well be that we have to make deliberate policies that make the labor market tight. And that strengthens the bargaining position of employees, both individually and collectively.
In the US they have already reached the point where the central bank and the government are saying that the labor market must tighten. We, too, need steps in that direction to bring unemployment and wage growth to a level that we democratically decide is the ideal level.