By Howard Schneider

WASHINGTON (Reuters] – In October, the U.S. Federal Reserve was unable to achieve its hoped for surge of Americans into the U.S. workforce. The labor force participation rate is now at a record low for 15 months. Wage increases are continuing and reflecting the fact that the bank has hit a supply block.

The average hourly wage rose by 4.9% in October on an annual basis, which is the highest since March. This continues a trend of pandemic-era increases in wages. Fed officials are monitoring inflation for possible effects.

(GRAPHIC: Wage change by industry pay – https://graphics.reuters.com/USA-ECONOMY/JOBS/myvmnknlnpr/chart.png)

The Fed has generally welcomed the recent wage increases. This is likely to boost spending and economic growth as the pandemic-era government programmes decline. It also provides some evidence that the ultra-easy central bank’s monetary policy helps the poorest.

The lowest-paid hospitality and leisure industry saw their earnings rise by more than 11% in October, almost twice the rate of transportation.

(GRAPHIC: The jobs hole facing Biden and the Fed – https://graphics.reuters.com/USA-ECONOMY/JOBS/jbyprzlrqpe/chart.png)

The strong October employment report with 531,000 new jobs included a footnote. This was because the Fed had hoped that the growth in the labor market would slow down, thereby reducing the Fed’s hope of people returning to work or actively looking for work. Between 61.4% – 61.7% labor force participation rates have fluctuated since August 2020. This is far less than the pre-pandemic level at 63.4% which policymakers had hoped for.

(GRAPHIC: Labor market progress – https://graphics.reuters.com/USA-ECONOMY/FEDPROGRESS/yzdvxmmmdpx/chart.png)

The October rate stood at 61.6%. This was unchanged from September.

Capital Economics Senior U.S. Analyst said, “Unless that improves,” Economist Michael Pearce, wages are likely to continue higher and the Fed left open to the risk that “maximum employment” may arrive sooner, with a lower-than-anticipated level of jobs.

There was not a sign that the supply of labor had increased. Pearce explained that the rapid acceleration of wage growth over recent months suggests it has more to go. Fed officials claim that the Fed will increase participation as caregiving and virus worries ease. However, with the rate of growth in the workforce slowing even though case numbers are dropping back, we worry that this big decline in participation from the last few years could be permanent.

Jerome Powell (Fed Chair) and the top policymakers have so far deemed that an increase in wages does not coincide with increases in prices and labor productivity. It will therefore not be an inflationary force by itself and turn what is expected to be a short-term period of higher prices into something lasting.

(GRAPHIC: Wages, prices and productivity – https://graphics.reuters.com/USA-FED/WAGES/gdvzydqarpw/chart.png)

Recent improvements have contributed to narrowing some of the income gap in America. This has brought the $19 per hour average pay in leisure and tourism closer to the $31 national average and narrowed the spread for workers in tech-influenced and highest-paid industries.

(GRAPHIC: Industry wage as percent of national average – https://graphics.reuters.com/USA-ECONOMY/WAGES/gkplgdgomvb/chart.png)

(GRAPHIC: High vs. low wage industries – https://graphics.reuters.com/USA-ECONOMY/WAGES/klvykdgmlvg/chart.png)

Economists and Fed officials expect that U.S. growth will continue to grow as the economic system shifts back to more reliance on private earnings.

Atlanta Fed’s real time tracker of quarter-to-quarter economic growth for 2021 increased Friday to 8.5%, from 8.2% following news that 531,000 U.S. jobs were added in October. The pace is indicative of easing pandemic worries and may help the market make up any lost ground next year.

At 4.6%, unemployment is now only 1.1 percentage point higher than at 3.5%. This rate has recouped more that 90% of its spike in 2020 (when it was 14.8%).

Powell declared last week, after the Fed’s most recent policy meeting, that “Wages have been increasing strongly, very strongly…It is very important and it’s generally considered a positive thing.”

The Fed now links its policy and any rise in interest rates above the near zero level to “maximum unemployment”. This is an idea the Fed hasn’t quantified, but it will be judging against a variety of statistics such as the behavior of the labor force participation and wage growth.

These two factors influence one another, and Powell said this week that Powell was shocked by the inability to see an improvement in the number of workers or people actively searching for work.

We thought schools would reopen and end unemployment benefits to provide some additional supply of labor as the Delta coronavirus variant infections subsided. “That doesn’t seem like to have been true,” he stated.