This article is by staff writer William Cowie.

That Walmart, and more recently, McDonald’s are giving their workers much-overdue raises is now old news. What few realize is those raises might cost you a lot more than you expect — even your job.

Think that’s a little overstated? Hear me out.

The good news

Many have documented the fact that this recovery has, for the most part, bypassed America’s rank and file. Employment statistics look better and better every month; but still, most of the jobs added back during the recovery have been the low-paying kind in retail, restaurants and hospitality services.

So it is nice to know that some of the lowest-paid workers are getting a modicum of relief. The general feeling is that there is a real recovery after all. I see more and more evidence that the recovery has reached Joe Plumber and any other composite person created to represent middle class America.

But once or twice a month, I have lunch with a few small business owners; and ever since the beginning of the year, I have been hearing something I haven’t heard in close to a decade: “Good help is hard to find.” These business owners are having a hard time finding people who are qualified to do what they do, and many of the people they are willing to experiment with on the job don’t work out. Economists call that a tight labor market.

This is good news to people looking for jobs in Denver, and in many other areas too. It is not true in all parts of America, of course, and it’s not even true in all job categories here in Denver.

Case in point, my wife and I know of several good people (at least we think they’re good) who have been looking for a job for more than two years. Nevertheless, there are more areas exhibiting a tight labor market than we have seen since before the Great Recession.

This may seem like good news. “Finally, we have something we can call a recovery, if it was a Friday afternoon and we were feeling gracious.”

What could be wrong with that?

Big Brother is watching the same news you are — or in this case, it’s Big Sister. (“Big Sister” being Janet Yellen and the Federal Reserve.) A while ago, you saw how the Fed is watching the economy with a view to hiking interest rates at some point in the not-too-distant future. In particular, you saw that the Fed is interested in these two things to guide their actions:

  • Employment (or to be more accurate, the unemployment rate)
  • Inflation

The boffins at the Fed are not as dumb as some people make them out to be. They realize there is a lot more nuance to unemployment than the simple number quoted in the press. They understand that the labor force participation rate is not what they would like it to be. That, to a significant degree, is what has given the Fed reason to hold off raising interest rates for the time being.

In addition, the strong dollar and low oil prices have held the inflation number they use in check. Whether we agree with their definition of inflation or not, that is the number they use to make decisions which affect us. That is why it is important to keep track of what they see and to know how they interpret that information in their decision-making.

On balance

Which brings us right back to the Walmart and McDonald’s announcements. When lower-wage employers of the stature of those two behemoths make public announcements of raises and/or benefit bumps, everyone takes notice: you, the media … and the Fed. Below are a few quotes from a speech The Chair of the Federal Reserve, Janet Yellen, made at a research conference in San Francisco, sponsored by the San Francisco Fed a few days ago:

“Labor force participation is still somewhat lower than I would expect after accounting for demographic trends… And wage growth continues to be quite subdued. But I think we can all agree that the recovery in the labor market has been substantial… (and) labor market conditions are likely to improve further in coming months.

“… We must bear in mind that these very welcome improvements have been achieved in the context of extraordinary monetary accommodation. (However) the economy in an ‘underlying’ sense remains quite weak by historical standards, for the simple reason that the increases in hiring and output that have been achieved thus far have required exceptionally low levels of short- and longer-term interest rates.”

Translation: The economy (employment in particular) has finally rebounded, but that has mainly been due to record low interest rates (and Quantitative Easing).

She then reached the first of her two points:

1. The time is close for an interest-rate hike. “With continued improvement in economic conditions, an increase in the … rate may well be warranted later this year… The near-zero setting for the federal funds rate has facilitated a sizable reduction in labor market slack over the past two years and … a modest increase in the federal funds rate would be highly unlikely to halt this progress.

She is saying in effect that the Walmart and McDonald’s announcements will not be the last. The Fed’s policy of providing cheap money is finally having an effect. And it is the “finally” in that sentence which leads to her second point.

2. It takes a long time for any change to have an effect. “We need to keep in mind the well-established fact that the full effects of monetary policy are felt only after long lags. This means that policymakers cannot wait until they have achieved their objectives to begin adjusting policy … Doing so would create too great a risk of significantly overshooting both our objectives of … employment and … inflation.”

In other words, what she was saying is the good news of the Walmart/McDonald’s raises gives the Fed enough confidence to go ahead with raising interest rates sooner rather than later. They don’t believe it is prudent to wait until the evidence of the maturing of this economic cycle is irrefutable.

The holy grail of every central bank in the world is to orchestrate what has been termed a “soft landing,” i.e., slowing down the economy just enough to remove any inflationary pressure caused by shortages of labor and materials, but without inducing a recession. To my knowledge, none have succeeded, in part because of the long lag highlighted in point 2 above, and in part because a rate hike affects different sectors of the economy differently.

Therefore, the most logical expectation is that at some point in the not-too-distant future (i.e., less than three to four years from now) we can expect the economy to enter its next recession. That ties with history: In our lifetimes, the longest time between a recession bottom and the next downturn has been eight years. Eight years from 2009 would be 2017, which is two years from now.

Putting two and two together

Of course, nobody can claim to predict the future, and neither do I. I am just relating past history and what the most influential people are saying. It is better to be prepared than caught by surprise (like many were last time).

This scenario doesn’t have to change anything you do if you are:

  • paying off your debt as far as possible
  • making sure your emergency fund is topped off
  • keeping spending to the minimum
  • doing whatever you can to make sure that if your employer hands out pink slips, you are not included

If, instead, you do the opposite — i.e., make large purchases, spend freely, and forget about paying off your debt — a coming recession could cost you tremendously, especially if it means losing your source of income when times get tough.

If you are prepared when a recession comes, there is nothing to fear because it is just another phase of the ongoing economic cycle. You could even profit from it by waiting to pick up the bargains every recession brings.

How did you weather the Great Recession? Are you preparing for the next time the economy takes a turn toward recession?

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