The Atlanta Fed Wage Tracker: What’s it saying re wage growth and the Fed?

May 26th, 2016 at 1:45 pm

As OTEers know, I track various measures of wage and compensation growth. Five—count ‘em!—show up in the wage mashup, recently updated.

One increasingly popular series I’ve not included is the Atlanta’s Fed Wage Tracker (FWT). It’s an interesting and useful contribution, so let me make a few points about this series: what it shows, why it doesn’t belong in the mashup, and importantly, given that it’s accelerating faster than other series, what it says about wage-push inflation.

The figure below shows the most recent version of the FWT. While my mashup was last seen growing at around 2.3%, the FWT is popping along at 3.4%. Whussup widdat?

Source: Atlanta Fed

Source: Atlanta Fed

In fact, it’s a very different beast from all the other series, with two major differences (I first saw this approach in a Jesse Rothstein paper from a few years back). First, while all the other series take snapshots of wages in period 1 and compare them with snapshots from period 2, the FWT measures the growth of the same workers over 12 months. If Jane earned $10 in April of 2015 and $10.50 in April of 2016, her wage growth is recorded as 5%. In the “snapshot” series that we’re more used to, Jane’s wage growth is not tracked. We’re just comparing averages or medians of a sample of all wage earners (or blue-collar workers, or whatever) in two different periods.

By looking at continuously employed workers (actually, workers employed in both time periods), the FWT will typically show more growth than other series, since it’s including an “experience premium,” the bump to wages some workers enjoy as they age (or, similarly, as they add another year of tenure at their job).

The FWT is also, and this is an important attribute, less susceptible to compositional or demographic changes. If an improving job market pulls in a bunch of low-wage workers, the snapshots will reflect slower wage growth than the FWT, which excludes new entrants. This recent analysis by economists at the SF Fed shows this cyclical dynamic, along with a secular one of aging boomers leaving the job market (which also tends to push down wage growth since these leavers have higher wages), to be in play in the current wage-growth story.

The second unusual aspect of this wage series is that the median plotted above is not the median wage. It’s the median growth rate. They calculate the wage growth of people like Jane who were working in the survey over the course of a year, and construct a distribution of growth rates from which they plot (a 3-mo. moving average of) the median. That means the median growth rate in any given month could be for low-, high-, or mid-wage workers (that’s why I don’t think it belongs in the mashup).

So, besides the findings from the SF Fed re the impact of secular and cyclical trends holding back the broad measures of wage growth with which we’re more familiar, is there anything else to learn from this series? We know that continuously employed workers, especially full-timers, are more likely to experience wage growth than others, so the fact that this series grows faster than the mashup isn’t surprising.

But is columnist Robert Samuelson correct to conclude that these findings should exert “pressure on the Fed to raise interest rates,” as they reveal a tighter job market goosing wages more than we thought?

The SF Fed authors suggest maybe not: “As long as employers can keep their wage bills low by replacing or expanding staff with lower-paid workers, labor cost pressures for higher price inflation could remain muted for some time.” They do, however, note that if low-wage entrants are “less productive,” that could create inflationary pressures.

I examined such linkages in a recent post wherein I argued that any pass-through from wage growth to price growth was awfully hard to tease out of the data, even controlling for slower productivity growth. Using a simple method I describe in the post, “I simulate an increase in the wage variable and estimate the impact on price growth.”

Let’s apply that same test to the FWT.

The first figure shows that a one standard deviation spike in the FWT wage growth series has no impact on core PCE inflation over the course of the next 12 months. The second figure shows the same result for full-time workers.

Source: See data note.

Source: See data note.

Source: See data note.

Source: See data note.

This shouldn’t surprise you. A look at the first figure above shows that even FWT wage growth remains below where it was in the full employment 90s and even the less full 2000’s. If anything, this measure shows we’re still pretty far from full employment. Moreover, there’s increasing evidence that wage-push inflation isn’t so much of a thing as it used to be.

So, happy to add the FWT to the mix, but a) it’s not signaling inflationary pressures, and b) once you extract its built-in premiums, I don’t think it’s telling a very different story than the mashup series. The job market’s tightening, and that’s giving workers a bit more bargaining clout to push for wage gains. To which I say: it’s about time!

UPDATE: See Dean Baker’s smart take on this series (the one used in the SF Fed piece). He stresses a composition effect embedded in that series, stemming from an increasing selection bias.


Data note: The statistical analysis uses monthly, year-over-year percent changes in the core PCE deflator and the FWT. These are run through a VAR (vector autoregression) with 6 lags of the price and wage variables, and one control variable: the annual change in the broad trade-weighted index of the dollar. The figures show impulse-response functions of a one standard deviation shock in the wage variables on the price index (PCEC), with confidence bands of two standard errors.

The Fed’s next rate hike: what’s the rationale?

May 23rd, 2016 at 9:03 am

That’s what I struggle with over at today’s WaPo, along with connections to impressionist art and goat droppings. Like a number of analyses I’ve been posting of late, I find little passthrough from wage to price growth, even accounting for slower productivity growth.

The Post piece references a number of sensitivity checks of the finding that wage growth is not obviously nudging up price growth without showing the figures. Here, for OTEers only, are some extra figs.

Using wage growth instead of compensation growth doesn’t make any difference:

Source: see data note in Post piece.

Source: see data note in Post piece.

What about using quarterly annualized changes instead of year-over-year changes? As these data are considerably noisier, that too ends up showing bupkiss.

Source: see data note in Post piece.

Source: see data note in Post piece.

Some colleagues noted that it’s a little odd to pick on Lacker because he always wants to raise. Fair point, but I thought the most recent Fed minutes also had moments of MONETary policy versus the more data driven approach:

“Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen and inflation making progress toward [their 2 percent inflation] objective,” then an increase in June would likely “be appropriate.”

Yes, as I show in various places, wages and prices are “firming” a bit. That’s both good and totally expected as the job market improves and the price of oil slowly climbs back to more normal levels. The question is all about linkages to inflation, which is what I try to get at in my admittedly simple approach.

Let me leave you with this. It’s critical to elevate the role of international dynamics, including capital flows, in one’s thinking about these price dynamics. In this regard, I consider this ‘graf by Fed governor Brainard to be one of the more important these days:

Recent events suggest the transmission of foreign shocks can take place extremely quickly such that financial markets anticipate and indeed may thereby front-run the expected monetary policy reactions to these developments. It also appears that the exchange rate channel may have played a particularly important role recently in transmitting economic and financial developments across national borders. Indeed, recent research suggests that financial transmission is likely to be amplified in economies with near-zero interest rates, such that anticipated monetary policy adjustments in one economy may contribute more to a shifting of demand across borders than a boost to overall demand. This finding could explain why the sensitivity of exchange rate movements to economic news and to changes in foreign monetary policy appear to have been relatively elevated recently.

I will dive into this in a forthcoming post, as I believe these insights also militate against rate hikes without clear rationales re inflationary pressures, as higher rates exacerbate the flows problem for the US. But in the meantime, here are your reading assignments: the talk from which that ‘graf is pulled and one of the papers underlying this important argument.

Big Report, Little Finding: The ITC evaluates the economic impact of the TPP

May 19th, 2016 at 5:29 pm

The International Trade Commission (ITC) just released its 792-page monster of a report on the “likely impact” of the Trans-Pacific Partnership (TPP) on the US economy. The findings are largely positive on net but tiny, which confirms two of my priors. First, I see no rational way your support or opposition to the TPP can be informed by these findings, and second, trade agreements, as opposed to trade, have little to do with US growth and jobs.

That is not, btw, meant to be a critique of the report. The fact that it shows tiny results, which I’ll get to in a moment, comports (as I said above) with my expectations of the economic impact of a trade agreement with a bunch of countries, 6 with whom we already have trade deals.

But as I’ve stressed before, it is beyond our capacity to plausibly model the impact of a complex, 6,000 page, 12-country trade deal 15 years out! Remember, we’re severely challenged trying to accurately predict GDP or jobs out one quarter or one month. And while the ITC report fails to provide confidence intervals around its estimates, they’d likely cross zero (i.e., be statistically indistinguishable from no change at all).

A bit of background. When the executive or legislative branch needs advice or technical expertise on matters of trade, they turn to the ITC. In the case of the TPP, the ITC was required to submit a report by today. Specifically, the ITC estimates that, by 2032, the TPP would:

  • Increase real GDP by $42.7 billion, or 0.15 percent;
  • Increase employment the equivalent of 128,000 full-time jobs, or 0.07 percent;
  • Increase exports by $27.2 billion (1 percent) and imports by $48.9 billion (1.1 percent);
  • Have the biggest sectoral impact on agriculture and food, increasing employment in that industry by 0.5 percent;
  • Decrease employment in the manufacturing, natural resources, and energy sector by 0.2 percent

[The report also project impacts out to 2047; again, with respect to our modelling capability, let’s not go there.]

OK, let’s wrap our head around the magnitude of these predictions. The forecast is that the TPP will boost real GDP 0.15 percent over its baseline value 15 years from now. When you back out the report’s assumed growth rates for real GDP with and without the TPP in place, you find that this is equivalent to one month of real GDP growth. That is, real GDP would hit its TPP level one month later in a world with no TPP.

Those 128,000 jobs are actually “full-time equivalents” meaning, for example, two half-time jobs count as one full-time job. One can adjust that number to be comparable to the payroll data we get each month, which boosts the ITC number to about 138,000 jobs. In other words, after 15 years, the TPP is predicted to generate what we’d call “a lousy month” for job growth.

Again, none of this means that the US should or shouldn’t sign the deal. What it does mean is that you can’t make that call based on jobs, wages, or incomes. You have to instead crack the damn thing open and decide where you stand on the dispute settlement procedures, the absence of a chapter enforcing rules against currency manipulation, the labor and environmental rights, and the drug patents and intellectual property agreements. These are the “rules of the road” I reference whenever we talk about trade deals, because for all the talk about jobs, jobs, jobs, it’s these rules by which we trade that comprise these deals.

What matters most is who’s at the table when those deals get made. I’ve stressed that this process must change to be much more inclusive, and not just on behalf of workers here, but on behalf of much less privileged workers in some of the other signatory countries.

One final point. One particularly troubling and restrictive assumption in these models is that the balance of trade—in the US case, the trade deficit as a share of GDP—is held fixed by design. Yet, one of the most impactful aspects of globalization has been the economically large trade deficits we’ve been dealing with in this country for decades. I can’t say whether the TPP would have much impact on that key variable; like I said, that’s a function of trade (and exchange rate movements, relative growth rates, central bank actions, and much more), not trade deals. But especially given the overly-optimistic record of the ITC in predicting trade balances (see this analysis by Public Citizen), this is another reason to cast a jaundiced eye on these predictions. As Congressman Sandy Levin, someone who follows these developments closely, put it: “The figures are also based on an optimistic assumption that our trading partners will open their markets to our exports, rather than simply replacing their existing tariff barriers with new non-tariff barriers, even though we have repeatedly seen that happen in the past.”

If it seems incredible to you that we’ve been intensely wrangling over this trade deal so hard for so long when these are the predicted outcomes, I urge you to expand your analytic framework. There’s geopolitics in the mix, along with powerful corporate interests pushing for market access, protected by rules they helped to write. It is on those criteria that one’s view of the deal must be formed.

Economists hold forth on ideas to boost productivity growth

May 19th, 2016 at 8:05 am

Paraphrasing Mark Twain’s famous comment about the weather, everybody complains about productivity growth but nobody does anything about it.

As OTEers are learning, for better or worse, I’ve been obsessed with the problem of slow productivity growth. It poses a fundamental constraint on the growth of living standards both here and in many other economies where the slowdown has been ongoing for a number of years now. Reading Robert Gordon’s magisterial new tome on the issue has only deepened my obsession, as Gordon is both highly authoritative on the issue and pessimistic about the path of future output per hour.* On the other hand, economic forecasting is particularly weak in this area and the experts have rarely, if ever, accurately predicted twists and turns in productivity growth.

One key insight I took from Gordon’s book is that productivity growth is more susceptible to policy than we think. The assumption that firms must be operating at the edge of their productive potential or they’d be out of business is surely wrong. There are inefficiencies being “left on the table.”

When unions in their heyday used their bargaining clout to raise their members’ pay, for example, higher labor costs meant firms either found ways to become more productive or shaved profit margins. So they found new efficiencies. (Josh Bivens and I have argued that this dynamic is likely operative in periods of full employment.) Gordon also vividly recounts the lasting impact of the war effort (WWII) in forcing productivity gains and lists numerous “headwinds” to productivity growth, including education, inequality, and poverty, all of which are variables that could be improved or worsened through policy or anti-policy (a.k.a. negligence).  He heavily stresses investment in human capital, starting with early childhood, as a way to boost productivity.

I’ve already offered a number of my own ideas on what might help, but this time I reached out to other economists to give me a sentence or more on what they think would be the best policies to raise productivity growth, either in the near or long term. Here are their (lightly edited) responses.

*[Be sure to listen to Gordon’s recent, excellent lecture on his book at the London School of Economics (here are the slides that go with it). Bob has his own interesting and elaborate policy agenda which I will write up separately. I could feed on this stuff all day but I don’t expect others to share that passion!]

Dean Baker, Co-director of the Center for Economic and Policy Research and co-author, with yours truly, of “Getting Back to Full Employment: A Better Bargain for Working People.”

I think full employment is the biggest deal. For me, that explains why productivity growth goes from ~2 percent pre-recession to less than 1 percent in the recovery. I don’t think there is going to be anything else that will buy you that much.

I do think we can get a lot by reducing/replacing patent and copyright protection (there’s incredible waste in these rents)” [JB: Gordon also stresses this last point re patents] “and also by downsizing the financial sector with a financial transactions tax. There are many other places where you could eliminate waste, most obviously health care, but none of them would produce anything like the bonanza from a full employment high wage economy.

One idea which may not help measured productivity much, but which I bet increases actual productivity hugely, is free public transit focused on buses (with designated bus lanes). If we got a large percentage of current drivers to instead take public transit it would enormously reduce the time wasted in traffic. That doesn’t show up in output per hour of work because we don’t count this time in productivity’s denominator [hours worked], but we certainly should in any reasonable measure of economic well-being.

Josh Bivens, Research and Policy Director, Economic Policy Institute

A big reason for the decline in last decade in productivity growth is reduced private capital investment. We should offset this with more public capital investment, including “core” infrastructure as well as renewable energy, education, and health care.

[Josh has also done great analysis of the linkages between full employment and productivity growth: “we need to seriously consider the possibility that productivity growth (normally thought of by economists as a supply-side phenomenon) is just the last casualty of the chronic demand shortfall that brought on the Great Recession and which was never filled in sufficiently to push the economy back to full health.”]

Alan Blinder, Gordon S. Rentschler Memorial Professor of Economics and Public Affairs at Princeton University

I’d go for early childhood education, especially for less advantaged kids. It takes a long time, but the payoffs are impressive.

[He’s surely right about that, and we do a lot less of this than other advanced economies.]

Heather Boushey, Executive Director, Washington Center for Equitable Growth and author of the new book, “Finding Time: The Economics of Work-Life Conflict” (Harvard University Press).

If we’re concerned about productivity, we have to be concerned about both the rate of technological progress and the quality and quantity of labor supply. In the United States, employment rates for both men and women have fallen both absolutely and relative to our economic competitors in the OECD. The United States now ranks 19 out of 21 OECD countries in primary age female labor force participation and there is evidence that this is in no small part because of our lack of attention to policies that allow families to address conflicts between work and life. The United States stands alone among the OECD for not providing paid parental leave, for example, although four states—California, New Jersey, Rhode Island, and New York—now have implemented programs. Schedules are also an issue and thus it’s important that this Wednesday, the U.S. Department of Labor announced updated overtime standards, which also are the kind of policy that can reduce the day-in, day-out conflicts over time use and help boost or maintain labor supply.

[Bonus: JB on new overtime rule.]

John Fernald, Senior Research Adviser at the Federal Reserve Bank of San Francisco

[John is one of today’s foremost experts on growth theory and evidence, and I noted his measured expectations re the impact of policy on productivity growth (“no magic bullets,” “at the margins,” “slightly”). It’s an important reminder that a lot of what drives the productivity trend remains elusive.]

There are no magic bullets that would restore rapid productivity growth. But, at the margins, sensible policies around infrastructure, education, basic research, and balanced regulation can help. Many policies in these areas complement private-sector investments in capital and innovation; they pass microeconomic cost-benefit tests even in a low-growth world.  Because of this complementarity, these policies (slightly) raise the probability of seeing a larger, broad-based break-through in growth.

Jason Furman, Chair of President Obama’s Council of Economic Advisers.

The biggest source of the recent productivity slowdown is the slowdown in growth of private investment (which, by the way, has happened across the advanced economies), which has resulted from the overall slowdown in global demand–when demand is weak there is less reason for investment. We all like more investment in public infrastructure, but an underappreciated benefit is that by strengthening aggregate demand it would also increase the incentive for private investment as well, boosting productivity growth. When demand is low, expanding public investment can “crowd in” private investment. In the medium- and long-run, however, variations in productivity growth are almost entirely driven by “total factor productivity” (or innovation), not by added capital. Expanding the tax credit for research and development is one way that business tax reform could help productivity growth, essentially helping businesses to take into account the positive spillovers (“positive externalities”) that their investments in research have on the economy more broadly.

[Jason’s third link above takes you to the infrastructure chapter in his squad’s latest Economic Report to the President. For those interested in this topic–and if you’re still with me, that’s you–it’s an important read–a great survey of the lay of the land and the empirical connections between such investments and growth.]

Alan Krueger, former chair of President Obama’s CEA and Bendheim Professor of Economics and Public Affairs at Princeton

In addition to the usual suspects of investing more in R&D and corporate tax reform, I’d recommend considering lowering the threshold for overtime pay from 40 hours a week to 35 hours a week.

There are a couple of reasons why I think that lowering the OT threshold will raise productivity. First, companies will use workers’ time more efficiently if they have to pay more for the marginal hour or if they have a shorter workweek. Second, workers are fatigued with long hours. 

It is also worth noting that work hours have declined ‎more strongly in other countries as income has risen than in the US, so, in some sense, I think we have been facing a market failure when it comes to work hours. Our labor market creates a rat race where workers put in more time at work than is socially optimal, and the last hours are not especially productive.

[To be clear, the “OT threshold” to which Alan refers is not the salary threshold that was just raised by the Obama administration. It’s the 40 hours/wk threshold above which covered workers must be paid time-and-a-half.]

Erica Groshen, Commissioner, Bureau of Labor Statistics

Improving access to government administrative data so that statistical agencies could have access to more data to produce more and better official statistics would improve productivity in three ways: reducing burdens on respondents, improving the values of government statistics, and (likely the largest, but hardest to measure) improving the business, policy and personal decisions (allocation, investment, etc,) in the economy.

[It’s also important to be able to pursue] what we call “data synchronization”–allowing BLS and Census to share our establishment lists so that we can assign industry codes consistently across agencies. [Doing so could improve the accuracy of the] GDP, productivity and most national accounts.

[To learn more about the Obama administration’s statistical agencies’ ideas in this space, see this recent chapter on the role and use of “administrative data.” Note that these are data we are already collecting but not using – again, leaving efficiency gains on the table:

“Administrative data are data collected by government entities for program administration, regulatory, or law enforcement purposes. Federal and state administrative data include rich information on labor market outcomes, health care, criminal justice, housing, and other important topics, but they are often greatly underutilized in evaluating programs’ effects, as well as in day-to-day performance measurement and for informing the public about how society and the economy are faring.”]

Mark Thoma, Professor of Economics, University of Oregon

My first idea is more vigilant antitrust enforcement. As Dietrich Vollrath recently argued, a firm with a powerful market position has less incentive to invest in innovation. In addition, firms with market power can restrict innovation by other new or existing firms through strategies that limit their ability to enter markets.

The second is to do more to ensure that disadvantaged groups such as women and minorities can reach their productive potential, or have equal access to the resources needed to become entrepreneurs when they have innovative ideas. For example, to a large degree venture capital does not appear to be as readily available to women and minorities as it is to men.

Third, historically government investment in basic research has led to many productivity enhancing offshoots. Presently, support for basic research is at a 50 year low. A reinvestment in basic research could pay big dividends.

Finally, recent research has documented a falloff in the startup of ‘transformational entrepreneurial firms’ that have made substantial contributions to economic growth in the past. The reasons for this aren’t known, but finding the answer, and then implementing policies that can help to reverse this trend, could help to overcome growth stagnation.

[Re this last point, one wonders if there’s a size-driven acquisition story embedded in here somewhere, related to Thoma’s first point about antitrust enforcement: maybe large, rich firms absorb the small ones before they can flourish (e.g., Skype getting swallowed by Microsoft).]


As Fernald notes, no silver bullets but lots of common threads re public investments in both physical and human capital, along with less commonly heard ideas about work hours, work-family policies, and better data.  Nobody mentioned functional government, but I’m going to stipulate that this is implicit in all entries.

More to come!

The final overtime rule is out…

May 18th, 2016 at 10:28 am

…and it’s one of the Obama administration’s most progressive actions targeting middle-class paychecks. Here are links to everything you need to know about the new rule, which goes into effect on Dec. 1, and here’s my take at WaPo.

I ask you, OTEers, how often am I able to tout seriously good news on an economic policy that’s not just under discussion but being enacted? Of course, as I wrote:

The reason this is happening is that it’s an executive rule change, not legislation. This Congress would never have taken a step like this to help middle-class, working families. But if the next president is hostile to the new rule, it can be reversed (it takes some time to do so, but it can be done). That means the fate of the new overtime rule is tied to the outcome of the election. Or, to put not too fine a point on it, from the perspective of the middle class, the electoral stakes just got even higher.