Wage targeting: important idea but Chair JY’s not so sure…

April 7th, 2015 at 10:33 am

Over at the Upshot. I see much more upside than downside to up-weighting wage growth in the Fed’s liftoff calculus. I was surprised to hear Chair Yellen intimate otherwise.

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3 comments in reply to "Wage targeting: important idea but Chair JY’s not so sure…"

  1. Smith says:

    I’m in favor of and in agreement with the idea of using wage growth as a tool influencing monetary policy. But I think there’s a larger issue being overlooked.
    Examine Yellen’s concerns about influences on wages:
    “She cited productivity growth; global competition; technical changes that influence employers’ skill demands and thus wage offers; and the decline in unions.”

    To break it down for you, how could each factor raise inflation and reduce unemployment without raising wages, see below:
    Productivity, a company expands by hiring more workers. Normally even if they are less productive, wages go up, but not in our weak labor environment. Competition may also bring about unused capacity and some drop in productivity, though at-will employment has shown ruthless payroll reductions at times. Whether the competition is foreign or domestic plays an important role, and separately whether the labor is free or unfree (as all immigrant employer-sponsored labor accounting for 1/2 of legal immigration is) also makes a big difference.
    Global competition – one would think this has the opposite effect, it creates unemployment and lowers wages, making wages an ok barometer. Downwardly nominal wage rigidities would argue for relying on unemployment over wages levels. It shouldn’t be too difficult though to use whichever looks most appropriate. You can have rising inflation, lower wages and higher unemployment, because Americans willingly pay more for Japanese and German cars, and production in China can’t be shifted back to the U.S. quickly even if their costs rise.
    Technical changes – sad fact is that business would rather pay more for a machine that won’t go on strike than give workers a raise. You get lower wages and higher unemployment and higher inflation. Yellen may respond with rate hikes, which of course hurts the indebted worker further.
    Skill demands – no one in the 2000s including high skills college educated experienced significant wage increase (see page 23 of State of Working America) so the only skill demands affecting inflation through higher wages are the obscene compensation awarded to corporate titans who create no value, exploit labor, and get bailed out by taxpayers when things go south, with no accountability.

    I’m haven’t even mentioned the most important factor, which Yellen ignores, the ability to business to raise prices at will, to cover even modest wage demands.

    If you don’t address the issues above, you’ll see Yellon looking to control inflation by hurting the economy with no idea how inflation can climb accompanied by high unemployment and stagnant wages. It’s a different game we play today, economists haven’t caught up or caught on, no one but the 1%.

    • Smith says:

      I left out anything about labor, but the implication of Yellen on this reinforces my argument. Weak labor unions say more people can be hired which raises costs in an over expanding economy by reducing productivity, (per unit or borrowing costs or slower sales turnover, initial capital outlays, etc) unemployment declines, wages may remain stagnant, profits may even decline if growth is favored (startups especially, but sometimes factories too), some elements of dreaded stagflation.

  2. Tom in MN says:

    If real wage growth is not at least equal to productivity growth, and it has not been for quite a while, workers are getting ripped off. I can see why targeting *nominal* wage growth might not be what you want, but real wage growth should be a consideration.