U.S. jobs may be better indicator of real economy health than markets: Don Pittis

Stock markets have been going through a rough patch just as U.S. unemployment falls to new lows. It may be that, in the short term at least, full employment is not so good for markets, even as the wider economy strengthens.

Could market pain be an indicator that the U.S. economy has actually turned the corner into growth?

Stocks are an imperfect proxy for the wider economy, sometimes rising as inequality worsens and falling when employment grows stronger. (Reuters)

If you have money invested in the stock market, it is reasonable that you may be of two minds about today's jobless figures coming out of the United States.

Since peaking at around 10 per cent in 2009, unemployment rates in the U.S. have declined fairly steadily. And despite a recent sharp drop in stock prices, the jobless rate has continued to improve.

Today's private-sector job creation numbers are expected to remain strong, keeping unemployment around five per cent, which is in the range of what economists call "full employment" That is the rate at which virtually everyone who wants a job can go out and find one. 

Not unequivocally good

That's a positive indicator for the U.S. and Canadian economies, but not unequivocally good for markets.
U.S. unemployment has fallen to levels not seen since 2008 even as the stock market has sagged. (Reuters)

In the popular imagination, markets are a proxy for the wider economy. The relationship is actually far more complex, as we have seen in Canadian housing.

There is lots of evidence that, in the short term at least, roaring markets and soaring corporate profits are a far from a perfect stand-in for wider economic welfare. Looked at the other way around, a strong real economy, where wages are rising, is not necessarily something all shareholders find appealing.

The housing market is a good example of how markets and general economic welfare can diverge.

'Dangerously unaffordable'

Anyone who already owns a Vancouver home may be thrilled they could now sell it for nearly 30 per cent more than they paid for it one year ago. At the same time, the rush to build new homes creates jobs in construction and building materials.

For people who don't own homes but want to work and live in Toronto or Vancouver, things are quite different. As RBC said on Monday, those markets are "dangerously unaffordable."
High housing prices are good for people who already own one, but not necessarily for the wider economy. (Reuters)

There has been lots of analysis showing that falling interest rates have been good for people who hold existing assets, like shares and homes, as low-cost borrowing pushes up share prices, including through share buybacks.

Raising interest rates, of course, can have the opposite effect.

That may be part of the hostility toward Federal Reserve chair Janet Yellen's position that stronger job creation and a tight job market are an indicator that interest rates must rise.

By making borrowing more expensive, struggling companies with big loans may be pushed into bankruptcy. Existing bonds fall in value. So do portfolios of mortgages. Tottering real estate markets face the danger of a bubble popping. 

As I mentioned when Stephen Poloz took over for Mark Carney as governor of the Bank of Canada, cutting interest rates makes you everyone's friend, but raising them has the opposite effect.

Nudging inflation higher

According to conventional market theory, a tight labour market should begin to force wages higher as businesses try to outbid each other for a limited number of workers. That would be encouraging news for central bankers who have been trying to nudge inflation up as a safe alternative to the destabilizing effects of deflation.

But the author of new research on the causes of inflation says conventional market forces alone may not be enough to raise wage rates.

Jordan Brennan, an economist for the trade union Unifor, says his study shows that wage inflation only kicks in during periods of strong trade union activity and power. Based on an analysis of historical data, it was published this week in the Journal of Economic Issues.

At the same time, a new paper titled Rising Corporate Concentration, Declining Trade Union Power, and the Growing Income Gap suggests that weakening union power in the U.S. means there is no longer any countervailing power to force large global corporations to raise wages.
A new study says that weak labour laws prevent wages from rising, keeping inflation dangerously low and widening the inequality gap. (Reuters)

Brennan says the strongest period of wage growth was during the war years of 1939 to 1944, when the government controlled every part of the economy.

"This is a real irritation for neo-classical or free-market economists," says Brennan. "We cut income inequality in half in five years."

Creating a war economy — either here or in the United States — to improve income equality seems like overkill. However Brennan says changing the rules to give more power to labour would be a way to push up inflation and improve income distribution.

"Now strike activity in Canada and the United States is at the lowest point it's ever been at in the post-war period," he says. "And not surprisingly wage growth is flat."

A different explanation

Of course there may be another explanation for Brennan's link between labour activism and rising wages — one which fits the classical economic model just as well. As workers realize the commodity they offer is in short supply, they are increasingly able to wield their economic and political power, organizing as U.S. fast-food workers have done, to push wages up.

With the attention on Donald Trump and Bernie Sanders in the U.S. presidential race, there may be a growing realization amongst the establishment that poor and middle-class voters have been squeezed enough.

It seems pretty obvious that having more people working, earning more and spending more is good for a country's economy. 

As well as avoiding social instability, full employment, rising wages and the rebirth of the American middle class will be make American domestic industry better off in the long term.

Rising wages and rising interest rates may hurt now, but for people investing in the future, a healthy real economy will help make America strong. It is good for Canadian business, too.

Follow Don on Twitter @don_pittis

​More analysis by Don Pittis​

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.


To encourage thoughtful and respectful conversations, first and last names will appear with each submission to CBC/Radio-Canada's online communities (except in children and youth-oriented communities). Pseudonyms will no longer be permitted.

By submitting a comment, you accept that CBC has the right to reproduce and publish that comment in whole or in part, in any manner CBC chooses. Please note that CBC does not endorse the opinions expressed in comments. Comments on this story are moderated according to our Submission Guidelines. Comments are welcome while open. We reserve the right to close comments at any time.