I don’t plan to publish this wage mash-up every quarter, but given the building and misguided pressure on the Fed to start raising rates to prevent allegedly incipient wage and price inflation, I thought I’d update the previous quarter’s result through the first half of this year.
Dean Baker and I give the rundown re this debate here, wherein we enumerate the factors that should lead the inflation hawks to draw in their talons:
To understand why continued support from the Fed is unlikely to be inflationary, consider three factors: the current state of key variables, the mechanics of inflationary pressures and the sharp rise in profits as a share of national income in recent years, along with its corollary, the fall in the compensation share.
The figure below speaks to the first point. It plot shows the first principal component of five wage or compensation series in nominal, yearly changes since the 1980s–a technique to summarize a bunch of related data series in a way that pulls out their common signal.
The series are:
Employment Cost Index: Hourly Compensation
Employment Cost Index: Hourly Wages
Productivity Series: Hourly Compensation
Median Weekly Earnings, Full-time Workers
Average Hourly Earnings, Production, Non-Supervisory Workers
Even as the labor market slowly tightens, there’s still no evidence of wage pressure. Growth rates have been flitting about 2% since 2009, a rate that’s both stable and historically low.
Also, someone suggested I publish the wage data so those so inclined can fool around with it. Here’s the spreadsheet—knock yourselves out!
Source: BLS, my analysis. Underlying series are yr/yr changes in nominal wages.
You and others like you are setting us up for a fall. By framing the issue that there is no wage pressure and thereby no need to act you may doom the economy. In a perfect world wage pressure is good, and the Fed moves slowly to apply the brakes gently in the face of rising labor costs. In the real world where any increase in wages is met by increased prices, we get the worst of both worlds. Some segments of labor initially gain an advantage, meaning their wages jump a bit ahead of prices. The other segments suffer higher prices without attendant wage increases. Business plays catch up and then some. Average real wages decline, real wages of high demand segments remain stagnant as prices catch up, nominal increases cause the Fed to slow the economy. The difference between this stagflation and 70’s style is that it plays out at much reduced levels, hence jobless recoveries, rising inequality, vs double digit inflation and Fed induced recessions. The remaining debt overhang also impedes a healthy economy might benefit from wage driven inflation thus reducing real debt, but the Fed’s action in this scenario will also prevent that beneficial unfolding of events.
There are two points raised by my argument which are probably not clear enough.
a) I’m claiming your defense of Fed inaction is too influenced already by inflationistas. That is part of their game, to move the goalposts, make you play defense, making outlandish statements so even the slightest hint of real inflation will reward them with immediate action.
b) There is a very real problem with the economy in that actual wage increases will be met by higher prices to recover costs and this will fuel inflation, substitute nominal increases for real increases, and continue inequality. Only weakened labor power and slack job market prevent this.
1) Corporations have trillions in profits and are sitting on trillions of unused money. So if we follow the law of supply and demand any increase in wages would come from those sources not increases prices. So do you have any theories or data to suggest that supply and demand no longer applies to our economy?
2) The segment of labor that doesn’t get a wage increase and therefor suffers only higher prices would be labor that is less productive; because of the higher wages in the more productive sectors or firms more workers will “flock” to those and the end result will be better utilization due to more resources and workers being employed at the more productive firms.
3) Economic growth in the 70’s was higher then 80’s and the 00’s. Same goes for employment growth and that is despite the 70’s having oil embargoes and oil shocks. The “70’s stagnation” is a myth.
4) The “reaming debt overhang” is partial fixed/solved by higher inflation because it erodes the value of debt. So its rather ironic that you talk about debt being a problem but yet are against increased wages/inflation which would help solve that problem
It is simply misguided to think we can, without any side effect, increase the money supply until inflation (as measured by the myopic CPI) rises. There are significant side effects, namely asset bubbles and our ever increasing inequality. That increasimg the money supply fuels inequality is not some bizarre rant from a Austrian econ conspiracy website. Thomas Piketty himself slammed (his words) “money printing”
1) Bubbles don’t occur because of FED policy they occur because of mass ignorance/misleading of the real value of assets; without stimulating FED policy asset bubbles would still occur the only differences is that during that period economic growth would be lower meaning more unemployment and more suffering. Furthermore currently no asset bubbles can be seen (judging by historical data).
2) Increasing the money supply doesn’t fuel inequality; the power that allows the rich to send more proceeds to themselves is what causes our current level of inequality.
3) There is a reason why Europe still has double digit unemployment and hasn’t seen GDP reach is pree recession peak and its because Europe listened to all the people who were warning them about the horrors of inflation and so forth.
You’re still writing, and thinking, as if the people on the other side are thinking and writing in terms of real economics. They’re not. What Krugman used to talk about in 2010-12, when he wrote a lot about the “Confidence Fairy” was then, and is now, the right’s imaginary set of facts with which to push the Fed their way.
Please don’t wait until next quarter to re-re-re-explain to non-economist readers why it is that we’re nowhere near the stage where inflation is a threat.
Unfortunately, due to the massive propaganda machine in certain media outlets, there is a need to revisit topics that shouldn’t need visiting – certainly not constant revisiting. Please follow this piece with another that is even less, um, technical. It’s needed. What’s also needed is more of those 1-2 minute videos that explain a very narrow economic concept. Those were effective in 2010-12. They too are needed anew.
Thanks for all you do.