Blog repair…and a request for questions.

December 16th, 2018 at 1:47 pm

I’ve been remiss in keeping up with this blog. While I still post here–especially stuff that’s too technical to go elsewhere and my write-up of the monthly jobs numbers–I’ve taken to posting most weekly takes on this or that to my PostEverything WaPo column.

In the old days, however, I used to post a link here to those posts, often with an extra comment or two. Here’s a brief attempt to update:

This one’s more political than usual: I pushback on Frank Bruni’s NYT oped arguing that my former boss VP Biden shouldn’t run in 2020. To be clear, I don’t know who should run, but neither does anybody else.

Here’s some noodling about what I judge to be a highly interesting moment in macro-dynamics: the job market is fueling strong consumer spending, which is almost 70 percent of US GDP. But the other components of GDP are all shakier. It’s C vs. I+G+NX!

In a related recent post, I get into what some other sources recent econo-angst: the flattening yield curve and the late 2019 fiscal fade.

Another entry into current economic events: The cause for a pause in the Fed’s rate hike campaign.

–I recently interviewed the great Belle Sawhill on her new book, The Forgotten American.

–I’ve been putting together what I call a “reconnection agenda” set of pieces intended to help members of the new House majority and their staffs think through some of the key policy issues that have been ignored or abused for too long. Here’s one on fiscal policy and one on jobs. Tomorrow, I’ll post #3 in this series–on climate change.

I’ve also featured the occasional musical link to share with those who, like me, recognize the essential importance of great music to get us through these challenging times. We if you need to ingest the chill pill, I’ll happily write you a prescription for the first cut here from the Gator: Willis Gator Tail Jackson.

Finally, I was asked to do a video answering questions folks have on anything I write about–economy, political economy, markets, fiscal policy…you know my methods. So, if you’ve got a question that might be usefully addressed in such a venue, please post it to comments.

Thanks, and seasonally-adjusted greetings (which I guess means no greetings at all!).

Nick Hanauer’s Progressive Labor Standards: A bold idea to do more than just repair the damage.

December 11th, 2018 at 1:31 pm

According to Wikipedia, Nick Hanauer is “an American entrepreneur and venture capitalist.” True, but very incomplete. Hanauer is also a prominent progressive thinker, advocate, funder, and writer. I’ll get to the purpose of this post in a moment (to amplify a new piece out today in the journal Democracy) but I’ve long appreciated Hanauer’s ability to frame economic problems and solutions in ways that both make common sense and point the way forward toward bolder policies than many of us tend to come up with.

Probably the most prominent example of his work—no less than President Obama used to reference it all the time—is Hanauer and Eric Liu’s “middle-out economics,” a concept that puts the middle class, not the wealthy, at the center of the economy:

“It is time to kill the myth of trickle-down economics — and to replace it with the true story of middle-out economics…Middle-out economics argues that national prosperity does not trickle down from wealthy businesspeople or corporations; rather, it flows in a virtuous cycle that starts with a thriving middle class.” 

Amen! But beyond not doing the obviously wrong thing—cutting taxes for the wealthy—what are some specific examples of policies that would promote middle-out economics?

How about “progressive labor standards?”

In this new piece, Hanauer looks closely at an area of public policy that is essential for pushing back on the increasingly disproportionate power of capital: labor standards or regulations that protect vulnerable workers from employer exploitation. Their long erosion is one reason why worker bargaining clout is so low, and it is neither an accident nor a benign act of nature. It’s an explicit part of the anti-worker, anti-union conservative project.

Based on this recognition, Hanauer lays out a counter-agenda that goes much further than many of us in the labor standards debate who seek mostly to repair the erosion and prevent egregious maltreatment of vulnerable workers—to adjust the federal minimum wage for inflation, to prevent wage theft and misclassification of regular employees as self-employed. Basically, we’re playing defense.

Hanauer plays offense. He calls on progressives to go outside the box and ramp up labor standards to curb corporate power, especially that of large companies whose increased concentration within their industries is raising employer- over worker-power even further. Though I offer caveats below, it’s refreshingly bold stuff!

Hanauer adds an important dimension to the inequality diagnosis that sets up the piece. It’s no longer adequate to consider only the widening distributions of wages, income, and wealth between households. Certain firms now dominate their industries, where they can set prices and wages (importantly, these so-called “monopsonist” firms have tended to hold down wages more than raise prices). Geographical inequality is another key dimension, as the individuals and companies benefiting the most from the consolidation of income and wealth are highly geographically concentrated, leading to rising spatial inequality between prosperous tech hubs and the rest of the country.

Market concentration is a key target of progressive labor standards: “74 percent of e-books are sold by Amazon, 75 percent of candy is sold by Mars and Hershey, and 86 percent of basketball shoes are sold by Nike. Retail is particularly concentrated, with 69 percent of the office supply market controlled by Office Depot and Staples, 90 percent of the home improvement store business by Lowes and Home Depot, and an astounding 99 percent of the drug store market dominated by just CVS, Walgreens, and Rite Aid.”

The key to progressive labor standards is to not merely establish a set of workers’ benefits, but to scale the benefits to employer size. The minimum wage might start at a “regionally adjusted” $15 and hour but go as high as $22 an hour, based on an employer’s size and market power:

Just like a progressive income tax employs multiple tax brackets to levy higher tax rates based on the size of one’s income, a progres­sive minimum wage might apply multiple “wage brackets” based on the size of a company’s workforce.

Hanauer proposes a graduated scale to cover the full spate of labor standards, including retirement and health benefits, paid leave, and overtime policies. Presumably, fines for violations would be scalable as well, so wage theft and misclassification would be much costlier to Apple than to the guy with an apple cart.

Ok, how could this go wrong? One issue is measuring and thus penalizing labor exploitation. A metric that has surfaced in this evaluative space is: “do employees receive public benefits?” Trust me, I understand the problem of large, profitable firms whose workers don’t earn enough to avoid collecting public benefits. But to ding companies who hire such workers threatens to both vilify benefit receipt and engender an unintended version of “statistical discrimination,” where employers are careful not to hire workers who look to them like someone who might draw public assistance. Let’s work to raise wages, not to expose benefit recipients to potential discrimination.

Second, it is harder than it sounds to surgically target one type of firm over another, in no small part because to do so creates an incentive for a targeted firm to make themselves look like a non-targeted firm. Hanauer’s aware of such gaming potential and offers a good idea to prevent it, a “whichever is larger” rule, meaning the progressive standards get applied to workers based on the largest entity in the employment relationship. Thus, an employee outsourced from a small firm who works at a large firm is under the standards of the latter. Still, my experience is that carefully defining and enforcing such rules can be hard, which is one reason why raising taxes on those at the top of the income and wealth scale is a straightforward, progressive complement to these ideas, one Hanauer is fully signed on to.

Finally, while Hanauer wants to rebalance power between small and large businesses, I also worry about progressive standards leading to a real division between good jobs at large employers and much less good ones at small employers. Clearly, he’s justly proposing to raise labor costs at firms whose industry power allows them to set wages too low. But I can imagine a local labor market where this creates some weird competitive pressures. This is why economists tend to prefer uniform regulations that don’t create competitive disadvantages for one firm over another. That said, Hanauer’s goal here is to offset some of the evolving advantages of larger, powerful firms.

But all big ideas come with big challenges and none of these are insurmountable. Moreover, many of us on the progressive left tend to fall into a trap Hanauer avoids: negotiating with ourselves. Given the deep-pocketed, relentless opposition from the forces of inequality, to start out where we want to end up is formula for consistently under-delivering. To do so invokes significant negative consequences for both the effectiveness of our policies, while reducing the political support from the many voters who long for a true progressive agenda, one that doesn’t nibble at the edges of power, but takes big bites out of it.

In other words, let us continue to look for the boldest ideas we can come up with in the pursuit of middle-out economics!

Another solid jobs report, even with a slightly slower trend in payrolls

December 7th, 2018 at 9:33 am

Payrolls were up 155,000 last month, and the unemployment rate held steady at 3.7 percent, close to a 50-year low. Hourly wages were up by 3.1 percent over the past year, the same rate as last month and tied for a cyclical high. Though another in a string of solid job reports, the pace of job gains downshifted a bit compared to last month’s report, average weekly hours ticked down slightly, and both the job and wage numbers came in below market expectations. That said, monthly noise, weather and other one-off effects (winter storms, fires) can influence monthly data, and the underlying trend remains that of a labor market closing in on full employment.

To better glean the underlying trend of job growth, our monthly smoother looks at 3, 6, and 12-month averages of monthly job growth. The 3-month average of 170,000 is slightly below that of the 6- and 12 -month averages, suggestive of a slower trend in monthly payroll gains. However, this pattern is to be expected as the labor market closes in on full-capacity. In fact, the 3-month pace (170K), if sustained, is easily strong enough to put further downward pressure on the unemployment rate and thus, upward pressure on wage growth. Moreover, as I note below, I suspect real (inflation-adjusted) wage growth will soon accelerate due to declining oil prices.

Wage growth held at its cyclical high reached last month of 3.1 percent, year-over-year, a sign that tight labor markets are giving workers a bit more bargaining clout. The figures plot nominal gains for all private sector workers and for middle-wage workers (blue-collar factory workers and non-managers in services). The six-month moving average shows the recent acceleration from about 2.5 percent through 2017 to around 3 percent this year.

But what about real wage growth? Over the near term, real wages and the price of oil tend to be highly correlated. That is, falling oil and gas prices lead to slower overall price growth, which raises real wage growth. That means we now have two factors helping to boost real wage growth: the tight labor market is generating faster nominal wage gains, and cheap oil is pushing up real gains. Though we do not yet know CPI inflation for November, my guess is that the price index is up about 2.2% over the past year. If that’s correct, it means real hourly wages grew at a yearly rate of about 1 percent, the fastest pace of real wage gains since late 2016.

Other highlights from today’s report:

–The closely watched “prime-age” (25-54) employment rate was unchanged at 79.7 percent. However, it was up 0.2 points for men and down slightly for women. Abstracting from the monthly blips, this series, especially for men, shows potential available labor supply, as the men’s rate is still 1.6 points below its pre-recession peak (prime-age women have surpassed their peak).

–The black unemployment rate fell to 5.9 percent, tied for an all-time low, but the decline was accompanied by lower labor force participation, so it’s not unequivocal good news. Also, these data are particularly noisy, month-to-month.

–Construction employment was up only slightly (5,000), possibly reflecting the slowdown in the interest-rate-sensitive building sector.

–Government employment has been flat in recent months, driven largely by state-level declines, possibly reflect state budget constraints, particularly in education.

Finally, turning to the Fed, according to recent news reports, the central bank is considering downshifting its “normalization” campaign, meaning pausing between rate hikes more than they’ve heretofore been signaling. Today’s report constitutes a supportive data point in that regard. Wage growth is growing but not quickly accelerating, and the trend pace of job gains is off its peak, as shown in the smoother. Most importantly, as the figure below reveals, even while unemployment remains well below the Fed’s “natural rate” and wage growth has picked up, their key inflation gauge remains not merely well-anchored but, in its most recent print, slightly below target.

Given other recent headwinds, most notably the flattening of the yield curve and the fact that fiscal stimulus is scheduled to go neutral in terms of its growth contribution later next year, the cause for a pause continues to gain momentum.

Energy prices and real wage trends

November 12th, 2018 at 8:03 am

I’ve got a piece up in today’s WaPo on some of the economic and social implications of the recent tanking in oil prices. Obviously, such prices jump around, and OPEC is talking about reigning in supplies, so the negative trend could reverse. But the points of my piece are a) low oil may be a boon for consumers at the pump, but it’s inconsistent with sustainable growth, and b) especially post-midterms, it’s time to start talking about taxing carbon. I suggest raising the gas tax as a good start, which, as I show, is more bipartisan than you thought.

The piece also has a figure showing the impact of changes in energy prices on the growth of real wages of middle-wage workers. I point out that the correlation between those two variables is much higher now than in the past.

The “energy effect” in the figure is simply the difference between real wage trends with and without energy costs. The first figure below shows wages deflated both ways. The blue line is real hourly wages (production, non-supervisory workers), yr/yr, and the green line is wages deflated by the CPI without energy costs. Therefore, when the two lines are broadly coincident, as in the earlier decades, it implies changing energy costs weren’t much of a factor in real wage growth outcomes.

The second figure shows the same CPI-deflated real wage trend but plotted against the difference between the two series in figure one, the idea being that wg/cpi – wg/cpi_no_energy nets out the energy impact.

Source: BLS, my analysis.

Source: BLS, my analysis.

Does faster wage growth imply passthrough to faster price growth? Not necessarily. (Though see update at the end.)

November 6th, 2018 at 4:59 pm

Introduction

As long as we’re sitting here on pins and needles re the midterms, let’s distract ourselves with some analysis of the state of the wage/price passthrough. Though not quite at the level of flipping the House, this is important information regarding inflation, interest rates, and Fed policy.

As the job market has improved, wage growth has picked up. Last week, two closely watched hourly wage series—the Employment Cost Index and the Establishment Survey wage—hit 3 percent growth on a yr/yr, nominal basis, about double their growth rate from five or six years ago.

Though it’s the highest growth rate of the expansion so far, 3 percent is a lower nominal growth rate than earlier periods when unemployment was as low as it is today (3.7 percent). That’s partly of function of slack still left in the job market, low productivity growth, and low inflation. Nevertheless, many economic commentators have argued that as tight labor markets push up wage growth, faster inflation will follow, as employers pass through higher labor costs to consumers. Anecdotal news reports back this up, suggesting that after years of historically low inflation, employers are finally feeling some pricing power, which they’ll use to help maintain their profit margins as labor costs rise.

This note examines the validity of that claim in today’s US economy. Using data covering about the last 30 years, I find that while wages and prices correlate, the correlation has fallen over those years and, at least in the national data, there’s little evidence that faster wage growth will lead to faster price growth. To be clear, this is not a claim that inflation will stay around where it is today as the economy continues to close in on full capacity. But it is a claim that if price growth does accelerate, it will not necessarily be due to faster wage growth.

Recent average wage and price trends

To avoid cherry-picking, wage analysts often use principal components analysis to combine various wage series (such analysis works like a weighted average, down-weighting noisier relative to more stable series to extract a more representative signal of underlying wage growth). My version, which mashes up five wage and compensation series (including the two noted above) is shown in Figure 1.

The series is quite cyclical, suggesting there’s a wage Phillips curve through which slack maps onto the pace of wage growth, along with the other determinants noted above: inflation and productivity (changes in labor-force demographics matter too). Most recently, nominal wage growth bottomed out at around 1.5 percent in late 2012 and is now closing in on 3 percent.

Figure 2 adds two inflation series to the wage series, also in yr/yr changes: the PCE deflator and the core PCE deflator. A few key patterns appear. While wage growth has gone up and down since the mid-1990s, price growth, especially the core index, has stayed “well-anchored” around the Federal Reserve’s 2 percent inflation target (though the target was only formalized in 2012).

Due to data constraints, my 5-wage mashup series only starts in the early 1980s, but a longer series (Figure 2b), the BLS production, non-supervisory series that begins in 1964, shows roughly the same pattern with the same break point in the mid-1990s.

The rectangle at the end of the figure highlights the most recent dynamics of this relationship, with the wage clearly accelerating and the core price index stable at 2 percent, where it has been for the past five months. Of course, these few data points don’t make a statistical case regarding passthrough, so for that we turn to simple models of the process.

Wage-price passthrough in regression models

I begin with a simple model using quarterly data to regress yearly PCE price changes on the lagged wage series from Figure 1, import and energy price controls, and a measure of labor market slack. However, passthrough regressions typically adjust for productivity growth so that the variable measures unit labor costs. The theoretical rationale is that to the extent that productivity improvements offset higher labor costs, price passthrough is less needed to maintain margins. The regression also includes a lag of the DV.

ULCs are measures of compensation per unit of output and are constructed in this case as yr/yr nominal wage growth (using the 5-series mashup series) minus yr/yr productivity growth. However, it is notable that the results hold if I use just the wage, unadjusted for productivity growth, or if I swap in the BLS ULC series for my constructed version. To smooth out the volatility in the wage and productivity series, I use a three-year moving average for both variables. Again, results are similar without the smoothing.

To capture the changing nature of the passthrough, I run rolling regressions in 10-year windows. The plot of the ULC coefficient around its 95 percent confidence intervals is plotted below (Figure 3). The passthrough starts out both economically and statistically significant and then falls to essentially zero around the mid-2000s.

As the next figure reveals, running a VAR with the same variables (with six-quarter lags in prices and ULCs), and then shocking the ULC variable generates the same result. The price response function is flat and the confidence intervals consistently cross zero.

Finally, a test with four lags finds that inflation “Granger-causes” productivity-adjusted wages (the null hypothesis that this isn’t the case is rejected), but not the other way around, with the latter being the passthrough channel.

Summarizing, based on this evidence, the recent acceleration in wage growth may not bleed into price growth as much as some recent commentary suggests, as this passthrough relationship has significantly weakened over time. Notably, other more extensive research by Federal Reserve economists comes to similar conclusions.

There are, however, a few important caveats. For most of the past decade, the Fed’s key policy rate has been at zero, the labor market was slack, and inflation was below target. None of those conditions prevail today, and even while some were controlled for in the above analysis, it is possible that earlier passthrough patterns could return. Also, national data of the type used herein can obscure important difference across geographical areas. Most germanely, research by Goldman Sachs economists (behind a paywall) has shown that even while national price Phillips Curves have been flat, those in various cities have had fairly steep slopes. It would thus be useful to look for passthrough in panels of geographical units over time. Of course, if passthrough does show up in that framework, such results, in tandem with those above, suggest that in non-metro areas, passthrough must be extremely muted.

At any rate, the findings suggest yet another reason for a data-driven Federal Reserve to carefully test all assumptions about the extent to which our historically tight labor market will lead to lead to wage gains that will, in turn, push up prices. There are a few links in that chain, and they’re not as binding as many appear to think.

Data note: All data are from BLS or BEA, with the exception of the CBO natural rate variable, used to construct the labor market slack variable (unemployment – natural rate).

Update: I just stumbled on a new piece from Daan Struyven from the GS research team who runs a similar analysis to that above but with arguably better data, and he finds significant passthrough (behind a paywall). He uses a panel data set of 167 industries covering the years 1998-2017, finding that a one percentage-point wage (or ULC) acceleration raises the price level by about 0.4 percent cumulatively over two years, with about 2/3’s of the action in year one. Should wage growth accelerate by half-a-point–from 3 to 3.5 percent–core PCE inflation might then get a 20 basis point bump from the passthrough. 

As I intimated above, I like the panel approach better than my own, and suspect this model is picking up a more reliable signal. If so, that’s a feature, not a bug, for the future path of core prices, as symmetry around the Fed’s 2 percent target means that the years of downside misses must be offset by a period of above target inflation.