Once jobless and uncounted, eager workers could slow Fed rate hike

[October 18, 2016]  By Howard Schneider

WELLSTON, Missouri (Reuters) - The crammed-to-capacity parking lot at a job training center in this St. Louis suburb is exhibit A for why the U.S. Federal Reserve remains at odds over the health of the U.S. labor market and how quickly interest rates should rise.

Among those in the building on a recent fall day, 23-year-old Joshua Goodson described his recent work history as a "dead end." Motivated by the prospect of a firm career foothold, he is now in a program at the Family and Workforce Centers of America that includes both a curriculum in heating and air conditioning installation, and the "soft" social skills needed to keep steady employment.

It will take a few months, but "I will get a job, and nail it," he said.

As the nation's six year run of job creation reaches deeper into neighborhoods like Wellston and nearby Ferguson -- site of a police shooting two years ago that highlighted the depressed economic conditions in some U.S. neighborhoods -- Goodson is among a pool of sidelined workers returning to the labor force in unexpected numbers and more readily landing jobs.

That subtle but surprising shift has stoked fresh debate within the Fed over whether to risk slowing a process that is finally drawing in marginalized residents like Goodson, and showing up in middle and lower end incomes.

The discussion may be unlikely to stave off a December rate increase. But it could influence the already glacial pace of tightening expected by the Fed.

A Reuters analysis of federal labor flow data shows workers are moving from outside the labor force directly into jobs at a record pace. That is what Fed Chair Janet Yellen and others hoped would take hold as the economy rebounded from a crisis that left millions jobless or caused them to stop looking for work and leave the labor force altogether.

It is also something trainees in this high unemployment pocket northwest of St. Louis hope will continue as they learn construction, business administration and other skills, confident there will be steady jobs at the end.

For Goodson, it is a chance to set aside a turbulent period in his life that included participation in the Ferguson riots two years ago.

"I want to change my life, better myself, try to get a skill or trade that could benefit me as a career," he said in an interview at a facility that is working to prepare an often young and often black clientele for jobs that are, at present, plentiful around St. Louis.

A HANDOFF TO THOSE ON THE SIDELINES

Job growth during a recovery typically first absorbs the unemployed -- people without a job who are actively looking for one -- before reengaging those who have dropped out. Over the past two years, there's evidence that has now begun to happen. The flow of workers from outside the labor force directly into jobs has grown to more than double the number captured in statistics as moving from out of the labor force to unemployed.

Seven years since the recession ended, loose monetary policy is "supporting the reabsorption of workers who have a relatively hard time finding employment," said John Robertson, a senior policy adviser to Atlanta Federal Reserve bank president Dennis Lockhart. It's a development policymakers want to understand better to judge if there are "structural limits" to how far it can proceed, he said.

With a national unemployment rate at five percent and other labor-related measures near long run averages, some policymakers argue their employment goal has been met and that interest rates should rise to stay ahead of the inflation that typically comes with a tightening jobs market.

Others are hesitant, noting as Fed chair Janet Yellen did last week that a "high pressure economy" may be what's needed to repair some of the damage from the crisis.

An eroded middle class or a poorly educated and compensated work force, she has argued, could impair the country's economic potential. The Fed's bias through much of the recovery has been to risk more inflation in favor of a fuller jobs rebound, and at her most recent press conference Yellen said she was encouraged.

Joshua Goodson, 23, Mark Morris, 17, and Sydney Roy, 20, (L to R) are seen during an interview at the Family & Workforce Centers of America in Wellston, Missouri, U.S. September 27, 2016. REUTERS/Howard Schneider/File photo

"We were not really certain that this is something that would happen," Yellen said of an uptick in the labor force participation rate.

"The economy has a little more room to run than might have been previously thought."

AN ENCOURAGING TURN IN INCOMES

After years of income stagnation, the steady demand for labor finally showed up in 2015 census surveys showing median incomes rising for the first time since 2007, with the strongest wage gains at the lower end. That's helping nudge people like Toshia Verheggen to take the trouble to retrain.

As her son reached school age, Verheggen, 37, heard about LaunchCode, a nonprofit that trains non-computer experts as coders and places them in apprenticeships. She landed a job early this year, moving from a labor force nonparticipant to writing software programs for a retirement benefits manager.

"Employers are bringing more jobs and more applicants are trying to get into the funnel," LaunchCode executive director Mark Bauer said of the current labor situation in St. Louis.

The movement of people like Verheggen into jobs is helping answer an important issue - whether the dislocation of workers during the crisis would be permanent, scarring their finances as well as the country's potential, or reverse as conditions improved.

Adults who are neither in jobs or looking for work are not considered part of the labor force. Their numbers have risen by a third in the last 15 years to more than 94 million, and grown as a share of the over-16 population from 32 percent to 37 percent.

While that sometimes figures into political rhetoric, it is mostly driven be demographics and personal choice as people retire, attend college, or stay home to care for family.

More telling is the number not in the labor force who say they want a job, meaning they would like to work but are not out looking. That number stands at around 6 million, roughly 2.3 percent of the population over the age of 16.

From a recent high of around 2.7 percent in 2012, that number has been falling towards its pre-Recession norm of close to 2 percent. To reach that level, a million more people would need to get back into work.

Carolyn Seward, chief executive of the workforce center where young adults like Goodson are training in heating and air conditioning, said people are ready to engage but still midstream in their plans. Now would be the worst time for job creation to slow.

"It is going to take another ten to fifteen years" to dent unemployment rates of 10 to 25 percent common in St. Louis' northwestern suburbs, Seward said. "There has been such a disconnect."

(Editing by David Chance and Edward Tobin)

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