The single best gauge of the economic recovery — better than the headline unemployment rate — may be wage growth.
So ignore April's sharp drop in unemployment. Pay no attention to the creation of 288,000 jobs announced on Friday. The most important number in the latest jobs report did not change at all.
Average hourly wages for American workers held steady at $24.31 last month. They have increased just 1.9 percent over the previous 12 months. But after adjusting for inflation, real wages have increased by something like 0.5 percent.
David G. Blanchflower, an economics professor at Dartmouth College, and Adam S. Posen, president of the Peterson Institute for International Economics, argue in a new paper that the slow pace of wage growth is the best indicator of an incomplete economic recovery. Until wages start rising more quickly, the economy remains far from healthy.
The two men also argue that the Federal Reserve should focus on wage growth in calibrating its stimulus campaign because wage growth effectively summarizes other measures like unemployment and participation.
Mr. Blanchflower found affirmation for this theory in Friday's jobs report. In the traditional view, the decline of the official unemployment rate should have indicated that the labor market was closer to good health, and it should have put upward pressure on wages. But the unemployment rate fell entirely because people stopped looking for work, not because they found jobs. And wages did not rise by even a penny.
"What happened today is entirely consistent with what we said would happen," Mr. Blanchflower said in an interview by telephone on Friday morning. "Hourly wages were up two pennies last month, and this month they're flat, and that tells you there's too much slack in the labor market. And all the other stuff is just noise."
Their paper is the latest contribution to a raging debate about labor market slack, a concept that is easy to explain, hard to quantify and very important right now.
When only 48 percent of American adults held full-time jobs in April, the important question is what share of the rest were prevented by the weak economy from finding full-time work. Put differently, how much of the damage caused by the Great Recession can still be fixed by the Fed, or by fiscal policies that broadly promote economic growth?
The unemployment rate, which counts people actively seeking work, overstates labor market slack during good times, because some people are always between jobs. Even during the halcyon 1990s, the rate bottomed out around 4 percent.
Since the recession, however, the unemployment rate has understated slack, because millions of Americans have stopped looking for jobs that do not exist. As the economy improves, it is likely that some of those people will rejoin the hunt.
Policy makers including Janet L. Yellen, the Fed chairwoman, say the unemployment rate remains the best gauge of the labor market. But they acknowledge it has lost some of its value.
In March the Fed said it would consider other measures, including wage inflation, in charting its campaign. Ms. Yellen suggested she would like to see wages rising at a "normal" pace of about 3 or 4 percent a year.
Mr. Blanchflower and Mr. Posen see an easier answer. Instead of counting heads, policy makers can simply rely on market forces to do the work. Wage inflation, after all, is basically a summary of the balance between supply and demand. Employers raise wages as they find it harder to hire and retain qualified workers, so the market, in effect, is constantly judging the extent of labor market slack.
"Unlike unemployment, the rate of wage inflation requires less judgment and is subject to less distortion by such factors as inactivity," the paper says. "Unemployment, underemployment of part-timers, long-term unemployment and participation rate reveal their nonstructural component by their influence on wage growth. And that is what the Fed should be trying to stabilize along with prices."
The main objection to this view is not about the accuracy of wage inflation, but about its timeliness. Wages generally are among the last prices to rise during an economic expansion. Prices, in particular, generally rise before wages.
To keep price inflation under control, Torsten Slok, chief international economist at Deutsche Bank Securities, warns that the Fed needs to begin raising interest rates well before wage inflation takes hold. Indeed, he contends the time has already come.
"If you want to hit inflation on the head, you need a Fed Funds rate that is above 4 percent, say 4.25 percent to create any pressure, and it will take you considerable time to get from zero to 4, and in the meantime you could see very substantial inflation," Mr. Slok said. "You could say that this is too early and we don't know quite yet, but I'm saying that if we run a risk, we run a risk of being behind the curve."
While Friday's report showed no sign of wage pressures, Mr. Slok said that some alternative measures of wages had started to show an upward trend. "About a year ago or six months ago, there was no sign of wage pressure, but when you look at the data today, some of the measures are starting to point upwards," he said. "If it really is the case that there is so much slack, why are any of these indicators going up?"
But the greater concern about inflation, at the moment, is that prices are rising too slowly. The Fed's favorite inflation index rose just 1.1 percent in the 12 months that ended March 31, the government said on Thursday. That is well below the 2 percent pace the Fed considers healthy.
Mr. Blanchflower and Mr. Posen have experience as central bankers — they served separately in recent years on the Bank of England's monetary policy committee — and they argue that the greater risk is in failing to do enough about unemployment, in part because that is also the best way to raise inflation back to a healthier pace.
"Pulling back too soon is worse than pulling back too late," Mr. Blanchflower said. "And we won't know what full employment is until we begin to approach it."
—By Binyamin Appelbaum, The New York Times