The Economy that was not suppose to happen

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The labor market the United States is experiencing right now wasn’t supposed to be possible.

Not that long ago, the overwhelming consensus among economists would have been that you couldn’t have a 3.6 percent unemployment rate without also seeing the rate of job creation slowing (where are new workers going to come from with so few out of work, after all?) and having an inflation surge (a worker shortage should mean employers bidding up wages, right?).

And yet that is what has happened, with the April employment numbers putting an exclamation point on the trend. The jobless rate receded to its lowest level in five decades. Employers also added 263,000 jobs; the job creation estimates of previous months were revised up; and average hourly earnings continued to rise at a steady rate — up 3.2 percent over the last year.

Compare that reality with the projections the Federal Reserve published just three years ago. In mid-2016, Fed officials thought that the long-run rate of unemployment would be around 4.8 percent, and that this would coincide with 2 percent inflation.

If that were the jobless rate today, 1.9 million Americans would not be working who are instead gainfully employed. And despite this ultralow unemployment rate, inflation is only 1.6 percent over the last year, below the level the Fed aims for.

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But beyond the assigning of credit or blame, there’s a bigger lesson in the job market’s remarkably strong performance: about the limits of knowledge when it comes to something as complex as the $20 trillion U.S. economy.

The last few years have made it clear that the Phillips curve — the relationship between unemployment and inflation — has either changed shape or become irrelevant.

The breakdown of the old guidelines suggests that policymakers need to avoid overreliance on them, and to stay broad-minded to the full range of economic possibilities. Maybe using data from a few decades in the middle of the 20th century to set policy in the 21st isn’t actually a good idea.

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