The first Friday of every month I listen to all the “experts” on CNBC discuss the new jobs numbers. Today they were stunned by the fact that the recent upsurge in job creation has been accompanied by a slowdown in wage growth. We got a 252,000 figure this month, and another 50,000 from the previous two months. When all the revisions are finally in we’ll have about 3 million payroll jobs in 2014, well ahead of 2012 and 2103. Yet wage growth for last month was revised down from 0.4% to 0.2%, and this month came in at negative 0.2%. The 12-month wage gain is now only 1.7%, down from roughly 2% in recent years.
It was ROFL time for me as one commentator after another expressed puzzlement at why wage growth could be slowing during a time of strong job gains. And to be fair, I’m just teasing CNBC; their views are quite widespread, as most economists have never heard of a theory called “supply and demand.” Instead, economists work with a theory called “the supply curve.” Their (upward sloping) supply curve theory says that as the quantity of workers employed rises, wages go up. I recommend the alternative “supply and demand theory.” In my alternative theory when workers lower their wage demands (perhaps because they’ve been unemployed for a long time, or perhaps because extended unemployment insurance ended in 2014, the labor supply curve actually shifts right, and you slide down along the labor demand curve toward higher employment and lower wages. They have causality backwards. Jobs are rising fast because wage growth is moderating, just as the sticky wage/natural rate hypothesis predicts.
OK, enough fun and games. Now that 2014 is in the books, what happened? The answer is plain as day, but you’ll never even see it mentioned in a Keynesian blog like Conscience of a Liberal. There was a strong positive supply shock in 2014, which led to faster job growth and falling wage and price inflation. The price inflation decline may partly reflect lower commodity prices, but the slowdown in wage inflation probably reflects (in part) the end of extended unemployment compensation. (I believe that many states are planning to raise minimum wages next year; it will be interesting to see what the aggregate wage growth numbers look like in 2015.)
Early in 2014 Paul Krugman argued that the fear that extended UI had been inflating unemployment numbers was refuted by the mediocre jobs numbers. He spoke too soon—we had a tough winter, and at that time Congress was still debating an extension. Once it was clear the extended benefits were gone for good, and would not be paid retroactively to the long-term unemployed, the jobs figures really took off. I predict that if Keynesians discuss 2014 at all, it will be through the lens of aggregate demand. They’ll say demand picked up, whereas it was supply that picked up in 2014. But Keynesians often assume the SRAS curve is fixed, and that changes in Q (real GDP) are all about demand shifts. Recall a few years ago when they blamed the slow British RGDP growth on a lack of AD, even as inflation soared above 4%?
Economics professors often bemoan the fact that students don’t really understand S&D, they don’t get the distinction between a shift in demand and a movement along the demand curve. My question is, “Do the professors understand their model?”
BTW, the unemployment rate is now down to 5.6%. You might recall that for quite some time I’ve been saying that unemployment will fall faster than most people forecast, as it had been dropping at 0.1% per month for years. We are still on that pace, and should be at “full employment” or less by the time the Fed raises rates. Does that mean they should raise rates in mid-year? It depends on what the Fed is trying to do. What is their policy objective? I wish they’d tell us.
(For instance, the “dual mandate” implies they should aim for countercyclical inflation, but I see no evidence that they understand that fact.)