Weak wage growth suggests the economy is not at full employment
Today's labour market report showed that the American economy created 156,000 new jobs in August. That was less than expected, but payrolls are still growing faster than the working-age population. Despite having created over 2 million jobs in the last year, pushing unemployment below 4.5% for the last five months, wage growth remains stagnant, at 2.5%, compared to the last time unemployment was low at 3.5% . One potential explanation for weak wage growth is retirement baby-boomers. In the long run, an economy and its labour market can sustain any inflation rate in equilibrium. However, the labour market is not in equilibrium. It continues to add jobs faster than the population can grow. If no output gap remains, more nominal GDP growth would translate into more inflation, and hence into higher nominal wage growth unemployment might also temporarily fall below its natural rate. Alternatively, it is possible that faster nominal GDP growth would lead to more job creation without sparking much inflation or wage growth, just as unemployment was higher. If the rate of wage growth is consistent with labour market equilibrium would change to account for a shift in nominal GDP growth. One would expect this relationship to have broken down, but it has not.
Janet Yellen’s critics tend to say she is excessively devoted to the idea that low unemployment portends higher inflation. They characterize this as adherence to the Phillips curve, which is associated in many peoples’ minds with Keynesian thinking. But it was monetarists who first argued that policymakers ultimately cannot control unemployment, because if loose money drives unemployment too low, inflation will accelerate. It is right for the Fed to look for the labour market for signals as to whether monetary policy is tighter or looser than the economy can sustain. Wage growth is the clearest of those signals. And it suggests that we are not in the long run yet.
No comments:
Post a Comment