Economist: Labor market to get even tighter this year

Economist Kevin Kliesen expects the labor market to tighten even more this year. | Photo by Boris Ladwig

Solid economic growth and an even tighter labor market this year will continue to put upward pressure on wages and benefits, a Federal Reserve Bank economist said.

Kevin Kliesen, business economist and research officer with the Fed in St. Louis, also said he expects neither a recession this year, nor a further hike of the federal funds rate, which is good news for consumers who are planning to borrow money for a car or home.

The U.S. economy created 2.7 million jobs last year, and job growth this year will remain solid, which, Kliesen said, should push the unemployment rate even lower.

“Many firms tell us … that they’re having a lot of difficulty finding labor, particularly in construction and transportation,” he said.

Retailers, restaurants and other employers had told Insider in the fall that they were increasing their starting pay, offering more flexible hours and changing job requirements to ease some labor market tightness.

Wage compensation, which includes benefits, rose 3 percent last year, the largest increase since 2007, and Kliesen said the tight labor market will continue to pressure businesses to raise wages and benefits.

However, ultimately people’s real wages depend on productivity growth, which depends on the employees’ skill level, educational attainment and modernity of the equipment they’re operating, he said.

While the U.S. has been in an era of low productivity gains since about 2005, Kliesen said he is optimistic about artificial intelligence and other technological advances enabling the American economy to return to higher levels of productivity, which also should boost wages.

Charles Gascon

His colleague, Charles Gascon, regional economist and senior coordinator at the St. Louis Fed, stressed the importance of education for economic growth.

The share of people with college degrees tends to be the greatest predictor of which cities are growing faster than their peers and which cities have the highest productivity gains, which benefits workers through higher wages and better benefits, Gascon said.

That’s where Louisville has some work to do, as the community lags behind the rest of the nation in both educational attainment and education spending, he said.

The Center on Budget and Policy Priorities said this month that Kentucky’s per-student spending, adjusted for inflation, was 13 percent below the level from 2008 and remains in the bottom half of the 50 states.

Gascon said Louisville and other communities have to figure out how to provide students with the right skills and knowledge to be nimble and adaptable, because by the time today’s young children graduate from college, many of today’s jobs in all likelihood won’t exist anymore.

The economists made the comments Thursday at the Louisville Regional Economic Briefing at America Place, an industrial campus in Jeffersonville.

Courtesy of the Federal Reserve Bank of St. Louis

Kliesen said that overall, the economy remains in good shape, with solid job growth, a low unemployment rate and inflation near the Fed’s 2 percent target. While tariffs have increased business costs and some of those have been passed to consumers, the impact has been offset by lower oil prices and the strong dollar.

He warned, however, that the longer trade tensions remain, the greater the likelihood that companies would be passing higher costs on to consumers.

Brown-Forman had said in an earnings call last week that retaliatory tariffs were costing the distiller about $125 million per year, but that, at least for now, the company had increased prices only in select markets and instead was focusing on market share.

Kliesen also said he does not expect the Fed to hike rates this year, in part because of reactions to its rate hike in December. At the time, Federal Reserve officials signaled more rate increases were likely this year and in 2020.

“Financial markets did not react well,” Kliesen said. “Stocks sold off (and) forecasters began to raise the spectre of inflation.”

Those reactions, he said, were “kind of a game changer.”

Because of the market turmoil, coupled with signs of weaker growth in the rest of the world, especially China and Europe — with Germany, Europe’s largest economy, teetering on the brink of a recession — Fed Chair Jerome Powell “called an audible,” Kliesen said, and indicated that the Fed would be “patient” with further rate hikes.

While the recession risk for this year has increased compared to the last few years, he said he does not expect a recession for this year. Professional forecasters have pegged the likelihood of a recession this year at about 26 percent, Kliesen said, with a risk of 39 percent in 2020.