PK on JB on JY

August 25th, 2014 at 2:49 pm

Paul K makes a cogent point re my post on Fed chair Janet Yellen’s explanation for recent wage trends.

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.

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6 comments in reply to "PK on JB on JY"

  1. Peter K. says:

    Obviously it’s hard say until we get the first rate hike and can look at the data and trends at that time. Then it will matter how quickly the second one comes after the first.

    Again, regarding the lack of deflationary pressures mystery, I like Robert Waldmann’s suggestion. Fox News, CNBC (see Kudlow’s miracle), and the Wall Street Journal, Investors Business Daily, etc have all been telling their elderly, captured consumers that inflation will rise remarkably any day now and besides the government is shading the stats. This raises inflation expectations somewhat. Now only if the Fed could convince more people by its actions that it was engaging in regime change and targeting 3 or 4 percent inflation.

  2. Rima S. Regas says:

    It’s better to raise your voice and ask questions now then guess what she means and be surprised one fine morning…

    Your initial post was spot-on. Please keep ’em coming!

  3. Tom in MN says:

    I think you are right to worry about a premature rate hike. Over the last decade or more the Fed has done of very good job of keeping wages from growing in real terms. And as long-term rates have steadily dropped, which sets the cap on short term rates at which contraction starts, it will take hardly any rate increase to knock down the start of real wage growth.

    • Peter K. says:

      On the other hand Greenspan did a good job in the mid 1990s as Baker points out, when the pressure was to raise rates.

      What makes me nervous is that they tapered prematurely. On the other hand (again!) it looks like they were uncomfortable with unconventional monetary policy and wanted to get out of QE ASAP which meant as soon as the economy could handle it without slipping back into recession. They might be better about the timing of raising rates given their promise to keep rates low for a long time after the data improves. I’d give it a 60-40 chance Yellen holds the line in accordance with the data and withstands peer pressure.

      She has said to the press she would like to see real wage gains.

    • smith says:

      Do not conflate a growing economy with a full employment economy.
      The same can restated a few different ways:

      Do not confuse GDP growth of 2.5%/year with wage growth.

      Picture a world where profits increase as productivity gains never flow to labor and inequality widens.

      Do not think that a situation of renewed steady and robust growth (moderate and non-inflationary 2 to 3%) which meets businesses’ need to show increased sales and profits necessarily ever leads to full employment and restoration of previously normal capacity, and economic potential.

      Explain any incentive business and monied interests have in restoring the economy to full employment. They’ve already shown that the lower output from idle workers and slower growth is more than offset by lower wage pressure and cheap money. The cheap money is a benefit not for lower borrowing costs (unneeded, they’re sitting on cash), but for profits on lending, plus benefit to stock market positions, and debt owed them as lenders at fixed rates. There is one more benefit in that high unemployment and slow growth discredits the Democrats who are prone to occasionally pass a few regulations, higher taxes, and progressive programs, however watered down and inadequate (the Dems give us still to big to fail banks, 80% of Bush tax cuts now permanent, Romneycare).

      • Peter K. says:

        “The cheap money is a benefit not for lower borrowing costs (unneeded, they’re sitting on cash), but for profits on lending,”


        Nick Rowe:

        “nterest rates, asset prices, and the rich

        Does anybody here remember 1982? When interest rates went very high, and so asset prices went very low. Just the opposite of today.

        What were people saying back then?

        1. Were they saying: “Central banks are setting high interest rates and making asset prices low, which is bad for the rich, who own all the assets”?

        2. Or were they saying: “Central banks are setting high interest rates, which is good for the rich, who have all the money to lend”?

        Because my memory isn’t very good. But I thought they were saying the second, back in 1982. And nowadays I think I hear the first, only in reverse.

        P.S. And is anyone today writing a book about “saving the hippo”?

        P.P.S. Maybe the underlying problem is that many people think about policy actions, when they should be thinking about policy regimes. Thinking about policy regimes imposes a symmetry on our analysis.”