Fed Turns to Job Hoppers as 1950s Inflation Guide Shows Its Age

(Bloomberg) -- Adrienne Heintz, an Atlanta marketing professional, has discovered a reliable way to earn higher wages, and Federal Reserve economists are taking note.

The Auburn University alumnus changed jobs twice in the past two years and nabbed raises of 10 percent and 8 percent as a result. “Switching positions internally or externally is definitely the fastest way to a larger salary,” according to Heintz, who is 28. 

She isn't alone in her approach, as a growing number of Americans are changing employers in search of more money. That trend is attracting the attention of labor economists, who are increasingly studying how job-hopping Americans drive compensation gains. The new focus comes at a time when the long-held theory that the unemployment rate can help forecast moves in wages and inflation is coming under scrutiny.

Studying the impact of job changes “is a more nuanced and deeper analysis of labor markets and gives you a better picture of what's really going on,” according to James Bullard, president of the St. Louis Federal Reserve Bank. “Look at the late '90s: Unemployment went down to 3.8 percent and we didn't get all that much inflation.”

Looser Connection

Analysts surveyed by Bloomberg don't expect lower unemployment rates to fan consumer prices in coming years either. They estimate inflation measured by the personal consumption expenditures price index will remain at the Fed's 2 percent target in 2018 and 2019 even as the jobless rate drops below today's 4.8 percent, which central bankers see as full employment.

Commenting on the link between unemployment and inflation, Federal Reserve Bank of Atlanta President Dennis Lockhart said “the connection doesn't seem to be as tight as it was in theory.”

Fed Chair Janet Yellen agreed this month that the relationship between unemployment and consumer prices has grown weaker, though she cautioned against ruling out a theory that has existed since the 1950s.

“Generally what we've found is that in a situation where labor and product markets are tight, inflation tends to move up,” she told the Senate Banking Committee in semi-annual testimony. “And movements in wage growth gives us a sense of just how tight labor markets are.”

Job Searches

Economists led by Jason Faberman at the Chicago Fed are delving into the impact of job searches, and have studied data from 2013 to 2015.

He and fellow economists found that 23 percent of employees are actively looking for another job on any given week, putting in four or five applications over a four-week period. In addition, employers are poaching workers, as 27 percent of offers to the employed are unsolicited, according to Faberman, as well as co-authors Aysegul Sahin and Giorgio Topa of the New York Fed, and Andreas Mueller of Columbia University.

And according to the Atlanta Fed's wage tracker, which monitors wages of continuously employed workers, Americans who are willing to change jobs do benefit. The data showed job switchers earned 4.3 percent more money in July 2016 than a year earlier, while people who remained in the same job enjoyed only a 3 percent increase.

“Job-to-job changes and the threat of job-to-job mobility are strongly predictive of wage increases,” according to David Wiczer, an economist with the St. Louis Fed who has studied the matter.

The insight underscores the importance of the so-called quit rate, a favorite indicator of Yellen that measures voluntary separations from an employer. The rate has almost recovered to levels seen before the recession of 2007-2009, which is a sign of confidence in the labor market. Job switching is “a good sign for the economy” and “an indication of dynamism,” according to the Fed's Lockhart.

Highly Cyclical

While Wiczer said that the bulk of wage hikes occur from job switching, he cautioned that the gains are highly cyclical, as the median job switcher didn't reap much of a salary increase during recessions.

Heintz is living evidence of Wiczer's findings. She didn't get a pay increase when she switched jobs in 2013, when unemployment was still high at 8 percent.

That doesn't mean that people like her are fueling inflation during tight labor markets, as they often receive better compensation only when their productivity increases, according to Giuseppe Moscarini, a Yale University professor and visiting scholar at the Philadelphia Fed. In fact, Heintz said her raises came with increased responsibility at jobs that better match her skills.

“What we should worry about are wage raises for workers who stay on the same job and are not getting more productive,” according to Moscarini.

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net.

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Randall Woods