Many of us, including Chair Yellen herself, take the fact that nominal wage growth has been stable for years now at around 2%–about the rate of inflation, implying flat real wage growth–as evidence that considerable slack remains in the job market.
As the Fed chair herself puts it:
This pattern of subdued real wage gains suggests that nominal compensation could rise more quickly without exerting any meaningful upward pressure on inflation. And, since wage movements have historically been sensitive to tightness in the labor market, the recent behavior of both nominal and real wages point to weaker labor market conditions than would be indicated by the current unemployment rate.
She then goes on to say, however, that “There are three reasons…why we should be cautious in drawing such a conclusion.” [My bold.]
I took this last bit to mean that if any of these three reasons are correct, then there’s less slack than the wage trends are telling us and we should maybe tighten sooner than later. My note then said nuh-uh: if you look at what’s allegedly behind each of these three reasons, even if any are correct, there’s still no obvious reason to preemptively tighten. See post for details.
Paul says not really. Instead, she’s just explaining why with all this slack, deflation hasn’t become an even bigger problem than inflation. And one answer to that is her first reason: nominal wage rigidity.
Others have said to me, “Chillax: she’s just throwing the hawks a
bone worm.” Kind of a “I know you’re out there–I hear you.” And that too matches up with Paul’s trenchant observation that reality-based analysts like Yellen try to see all sides of the issue whereas the ideologues blame the data, the government, whatever, when it contradicts their consistently wrong models.
I obviously hope they’re right. But I still think it’s fair to interpret the “cautious in drawing…” part above as entertaining the possibility that the Fed-funds-rate-liftoff may have to come sooner than the wage data would suggest. But as I wrote over the weekend, when you look more closely at each of the three reasons, I don’t think that’s right.