Slow wage growth? There’s no mystery to explain

Here’s The Economist:

WHEN America’s unemployment was last as low as it has been recently, in early 2007, wages were growing by about 3.5% a year. Today wage growth seems stuck at about 2.5%. This puzzles economists. Some say the labour market is less healthy than the jobless rate suggests; others point to weak productivity growth or low inflation expectations. The latest idea is to blame retiring baby-boomers.

There’s really no mystery here to explain.  Slow wage growth is caused by slow NGDP growth.  Period.  End of story.

Now perhaps there’s an NGDP mystery—how can unemployment be so low with NGDP growing at a rate of barely over 3%/year over the past two years?  But on closer inspection, even that is not a mystery.  Here’s Miles Kimball:

More and more central banks are facing a situation in which the output gap they are looking at looks close to zero, but inflation is below their target. This is arguably the case for Japan, Sweden and the US, for example. Even the eurozone is getting close to this situation. Sometimes journalists discuss a zero output gap combined with too-low inflation as if such a situation were strange, but a range of different macroeconomic theories all have the property that a zero output gap is consistent with any constant inflation rate. (This is an aspect of “monetary superneutrality.”)

The media seems to really struggle with the concept of monetary superneutrality. Since the 1970s, economists have understood that there is no long run trade-off between inflation and unemployment, but people persist is believing that if we could just raise inflation from 1.5% to 2% then lots more people would enter the labor force.  That’s unlikely.

PS.  In a recent post I pointed out that the public’s views on political correctness are not what you might assume.  Now we have a new poll showing that a plurality of African-Americans favor keeping Confederate statues in place.  Even if the poll is slightly off (the sample size is small) anything less than 10 to 1 black opposition to keeping Confederate statues is a surprise to me.  And Hispanics are almost 3 to 1 in favor of keeping the statues, the same as whites.  So much for the rainbow coalition.

We should not assume that liberal leaders speak for rank and file liberals, or that black leaders speak for the black community as a whole.


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39 Responses to “Slow wage growth? There’s no mystery to explain”

  1. Gravatar of Andy Harless Andy Harless
    28. August 2017 at 19:16

    I have to differ with Miles here. 10 years ago there was a range of theories that had the property that a zero output gap was consistent with any constant inflation rate, but most of those theories also had the property an output gap could not persist for a long period of time (at least not in the absence of a deflationary spiral). Those theories have been disproven by subsequent experience (2008-2015), and indeed a careful reading of the international evidence on PLOGs (prolonged large output gaps) before 2008 suggests that those theories were never consistent with experience. Money is not superneutral, except perhaps in the very long run. Economists thought they understood that it was, but it has become apparent that they understood wrong.

  2. Gravatar of Steve Steve
    28. August 2017 at 21:17

    There are some gems in the poll you linked to.

    For example, Latinos are the group most likely to agree with “White Nationalism” and also the group most likely to support nuking North Korea.

    And whites are more likely than African Americans to disagree with the KKK.

    Both the most telling question (because it supports my preconceived notions) is that 71% of college whites oppose the “Alt-Right”, wheres opposition is only 35%, 39%, and 46%, respectively, among Latinos, non-college whites, and African Americans.

    My contention is that “college whites” have been programmed to answer reflexively, whereas other groups answer more honestly (usually Don’t Know/Not Sure).

    The Alt-Right is a new, vaguely defined and little understood term, so it is a perfect litmus test for reflexive disassociation from perceived “bad” groups.

    Which leads to my preconceived notion, applied to your previous post, that college grads (esp. whites) support “free speech, but intimidating the speaker” rather than “banning speech” because they have been programmed with the acceptable answer, whereas other groups judge the speech directly.

  3. Gravatar of ssumner ssumner
    28. August 2017 at 22:19

    Andy, I’m not sure that Miles would disagree with your claim that superneutrality takes longer to occur than we had previous thought. But there’s no reason to assume it has not occurred by now. The unemployment rate is only 4.3%. It’s possible that there is still an output gap, but you can’t make that assumption based on the low inflation rate, or the unemployment rate.

    Miles seemed to be suggesting that we have other evidence that the output gaps in many countries have now gone away. If he’s right, then there’s no mystery to explain. That’s his point. If anything the mystery would be (as you correctly indicate) why did it take this long?

    Steve, Single-digit responses are not statistically significant

  4. Gravatar of ssumner ssumner
    28. August 2017 at 22:23

    Andy, I should add that I think it’s an open question as to whether superneutrality of money holds at very low inflation rates, due to the zero bound problem on nominal wage gains. But surely between 5% inflation and 10% inflation and 15% inflation it holds?

  5. Gravatar of Benjamin Cole Benjamin Cole
    29. August 2017 at 05:07

    If the output gap is zero now, that suggests an economy that has atrophied in some sectors.

    For example, housing starts were higher even in the 1960s than now, and were higher through most of the 1970s through 2006. Much higher. Like double current levels, in the 1970s.

    https://fred.stlouisfed.org/series/HOUST

    Really? We are full output now in housing? At a much lower level than previously, when we had a smaller population?

    Moreover, the Census Bureau says to expect 398 million Americans by 2050, up by 74 million from now.

    If this is full housing output, then our children will be sleeping several to a room. Or in tents.

    Industrial production has recovered, but to the 2007 level. Industrial production is up about 5% since 2000.

    I see rank defeatism in practitioners of orthodox macroeconomics. This is pathetic.

    Yes, beating inflation was supposed to bring economic nirvana. Instead we get a weakling economy.

    The outlook is for more of the same, unless the Fed engineers another recession.

  6. Gravatar of Philo Philo
    29. August 2017 at 06:06

    Re your last remark: “The Black community” is a cant term, since no group as large and as dispersed as American Blacks can form a real community (and it is not really a surprise to find that this group is ideologically diverse).

  7. Gravatar of ssumner ssumner
    29. August 2017 at 07:46

    Ben, A zero output gap doesn’t imply housing is at maximum capacity, you are confusing two unrelated issues.

  8. Gravatar of Christian List Christian List
    29. August 2017 at 07:56

    A telling survey. I bet 90% of all people (including black people) have never thought about those statues in their life. People care about education, the economy, crime and their well-being. A few political activists with no connection to the real world care about some stupid statues. This kind of fruitless political activism and ignorance to real problems has lost the Democrats the election in the first place – even against a guy like Donald Trump.

  9. Gravatar of marcus nunes marcus nunes
    29. August 2017 at 08:41

    There´s really no mystery (graphically illustrated)
    http://ngdp-advisers.com/2017/08/16/explaining-low-wage-growth-stockpile-pent-wage-cuts-changes-workforce-composition/

  10. Gravatar of Major.freedom Major.freedom
    29. August 2017 at 12:30

    “Slow wage growth is caused by slow NGDP growth.  Period.  End of story.”

    No it isn’t. And I don’t even need to rely on “period end of story” on account of not being able to explain it.

    I can do so simply by pointing out that NGDP is the money and spending on final goods and services, not on labor. In fact, expenditures on labor is in direct competition with, meaning mutually exclusive to, expenditures on everything else not labor, including final goods and services of which NGDP is supposed to track according to the various politburos who do this service for governments and their academic apologists, as it certainly isn’t valued in the market.

    Labor income is not a factor in NGDP. They necessarily move in opposite directions, ceteris paribus. If I spend more on labor, that additional money has to come at the expense of reduced spending somewhere else. You cannot spend the same dollar on more than one thing. To be sure, the muddled framework of anti-market monetarism tends to lead people into conflating all sorts of concepts, such as spending on labor and spending on that which makes up GDP. A is A, but sometimes we can believe A “as if it were” B, or some other lazy and incoherent appeal to end the analysis out of being tired.

    You speak of “correlations” between NGDP and wages? Good, there is also a correlation between global warming and pirate attacks. Correlations do not indicate causation. The reason why wages have tended to historically be correlated with NGDP (and even here the correlations have not been entirely persistent) is because both wages and NGDP are affected roughly similarly by the same underlying factors. I bet you would think it reasonable for me to say that if everyone’s wages doubled, that we would likely see NGDP go up. Doesn’t this prove wages drive NGDP? Is that why there is an apology for wage targeting as well? Because correlations cannot parse out what is causing what, so pick one and hope for the best?

    Or perhaps the final backstop is the “hot potato” theory? This is a flawed theory because it is putting the cart before the horse. Money doesn’t become “hot” in this way until an actual increased supply of money is brought about and spent, but that leaves unanswered the question of why the initial receivers of said money spent it in the first place before money become hot on account of THEIR spending first. And they must spend first. The member banks control what they spend. If they don’t “trade” more, through increased lending or purchases or investment, then all the increased reserves from the counterfeiters just doesn’t translate into increasing the temperature of money. Money can go cold here. Having said that, historically and empirically we see banks lending more when reserves have or are expected to increase, and this increased lending and subsequent spending and respending of money throughout the economic system is what then makes money hotter to hold. The initial drive to inflation was not hot potato, and everything after is not hot potato either. It is an adjustment in people’s valuations of money relative to capital, goods and services.

    It is not true that more money in existence forces anyone to spend it. Not when other intentions are present.

    And that comment you made, with “period, end of story”, sounds an awful lot like an appeal to an objective truth. I don’t see you write that “society” believes it to be true therefore it is true. You wrote it the same way a single person against the world writes, consensus be damned. In fact I know you know that only a tiny minority of people even heard of such a thing. Therefore, according to your own professed standards, that “period, end of story” comment IS NOT TRUE and is nothing but your opinion, your belief, just as good or bad as every other, since no objective standard is to stand as a means to judge them.

    You still want to claim no objective truth exists? OK, then nothing you have ever written is more than your opinion, which may or may not be believed by “society”.

    It is a good thing there are real scientists in the world who reject Rorty nonsense. We have a cure for many diseases now because people know the world as it is, and don’t believe simply because others believe. They know certain truths about the world, even if they don’t have all the answers. It is not all or nothing.

  11. Gravatar of Bob Murphy Bob Murphy
    29. August 2017 at 17:42

    Scott in the OP wrote:

    The media seems to really struggle with the concept of monetary superneutrality. Since the 1970s, economists have understood that there is no long run trade-off between inflation and unemployment, but people persist is believing that if we could just raise inflation from 1.5% to 2% then lots more people would enter the labor force.

    Then, after Andy Harless raised some great points, Scott admitted under cross-examination:

    Andy, I should add that I think it’s an open question as to whether superneutrality of money holds at very low inflation rates, due to the zero bound problem on nominal wage gains. But surely between 5% inflation and 10% inflation and 15% inflation it holds?

    Since we right now well below 5% inflation, maybe the media isn’t so stupid after all? And indeed, in their article they quote different economists who have different explanations, so it’s not so crazy that they start out the article by saying economists are puzzled by this.

  12. Gravatar of ssumner ssumner
    29. August 2017 at 18:40

    Bob, So let me get this right. The boring conventional textbook view is that monetary superneutrality holds in the long run. The data supports the boring conventional textbook view that superneutrality holds in the long run. But there’s a “mystery” here because the data doesn’t support some new highly controversial theory that money is not superneutral? Okay . . . .

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