Almost no labor market slack
In recent years, the unemployment rate has fallen to low levels (4.7%). Some people continue to argue, however, that there is a lot of labor market slack. They point to data such as the U-6 unemployment rate, as well as the labor force participation rate. But with today’s jobs report, it’s becoming almost impossible to continue arguing for labor market slack. The labor market is clearly tightening:
There is no longer any respectable argument for monetary or fiscal stimulus. There are arguments for stimulus that deny the natural rate hypothesis, but having lived through the 1970s once, I’d just as soon not experience it again.
Time for supply-side policies, beginning with a repeal of those idiotic overtime rules. Then on to tax reform.
PS. I am at the AEA meetings, so blogging will be sporadic for the next few days.
Tags:
6. January 2017 at 11:23
Good point.
I would still be more comfortable if NGDP was growing at 4% annually, rather than 3%.
Also, what do you think of this post?http://equitablegrowth.org/equitablog/musings-on-worker-stickiness-full-employment-and-productivity-growth/
Delong seems to think that the employees are less prone to hop from one job to another, which is lowering the NAIRU.
6. January 2017 at 11:23
Good thing the plan is to promote companies moving the lower end manufacturing jobs to mexico to continue raising quality and pay of job in the US.
6. January 2017 at 11:28
Those damned employees are getting raises! Better put a stop to that! We wouldn’t want men to get their first pay raise in 7 years and the first overall wage gain in 15:
https://mobile.twitter.com/gabriel_zucman/status/806599154357194758
6. January 2017 at 12:10
Is it that a more close to full employment situation leads to higher nominal wages but no change in real wages that is the problem you see?
What would be the problem if higher nominal wages led companies to use their labor more efficiently and invest in labor saving techniques? Then we might see some gains in productivity and actual increases in real wages.
Being a part of the labor force myself, I have no problems with increases in real wages. After all, haven’t real wages lagged productivity growth anyways for many years?
I am more inclined to agree with the sarcastic (I hope) sentiment expressed by Benny Lava earlier.
6. January 2017 at 12:35
Actually, from my own selfish standpoint considering my fixed rate mortgage debt, I don’t have any problem with increases in nominal wages either.
6. January 2017 at 12:40
I can see your point in a hypothetical scenario where the Fed manages a countercyclical inflation rate. But don’t we have a scenario where de facto inflation management is pro cyclical? Unless that problem is solved, doesn’t this prescription make the next recession worse?
6. January 2017 at 13:11
Dr. Sumner,
Having seen employers abuse the heck out of low-paid salary employees, I have to disagree with you. One restaurant owner I know has openly bragged about making her salaried workers put in 12-hour days, 6 days a week (and often be called in on day 7) and how it works out to less than minimum wage. The incentive for them, she bragged, is that she refuses to give any hourly employee more than 20-hours a week so they basically have to agree to be salaried and give up all time with their families in order to make any kind of a living.
That’s textbook wage-slavery and it makes the world a much worse place.
6. January 2017 at 13:19
@Randomize
Why is your personal anecdote at all relevant in a discussion about macroeconomic trends? Are you disputing the wage growth figures cited above?
It would be trivially easy for me to find 10 small business owners who will happily complain about how hard it is to find good employees. This should not meet a reasonable person’s standards for solid evidence for anything, though.
6. January 2017 at 15:04
Scott, you’ve said in the past that the NGDP growth rate is close to where it needs to be if long run real GDP growth is 1.2%. But the FOMC is projecting long run 1.9% real GDP growth. Shouldn’t the FOMC be concerned that the NGDP growth rate is below where it needs to be given its own forecasts? Also, are estimates of the output gap largely based on inflation? If so, I’m wondering if that’s a problem as Kevin Erdmann recently pointed out that if not for the strong increase in shelter inflation, core CPI would be only 1.1%.
6. January 2017 at 15:04
LK, That’s possible.
Benny, Don’t you think workers care more about real wages? (in other words, I think you missed the point.)
Jerry, See my reply to Benny. The graph shows nominal wages, not real. The Fed doesn’t have any control over the long run path of real wages, or indeed even nominal wages if they adhere to their 2% inflation target. This is about volatility, not levels.
Kevin, I’d say it makes the next recession far less likely. One cause of the 2008 recession is that monetary policy was too expansionary during 2006.
Randomize, I’ve seen lots of sob stories that cut exactly the other way, the regulation on overtime ended up screwing workers. What’s the market failure that calls for this regulation?
6. January 2017 at 15:13
LK, On NGDP growth, 4% is likely to lead to the next recession coming sooner than 3.5% growth.
Gordon, The Fed is concerned with growth and inflation going forward. They probably expect 3.9% NGDP growth, given their current policy stance. I think that’s too high, but as long as it’s what the Fed expects, I can’t criticize it. I believe they’ll end up with more like 1.5% RGDP growth and 2.0% inflation, over the next few years.
I think core CPI minus shelter will be closer to 2% than 1.1%, going forward.
6. January 2017 at 15:25
Why is the percentage of 25-54 year olds employed still below pre-recession levels and well below what it was in the late 90s?
https://data.bls.gov/timeseries/LNS12300060
It was 79.7% in Dec. 2007 and is now 78.2%.
6. January 2017 at 15:44
Oh Scott you troll like me. Where to start? First no they don’t care about nominal vs real. Hence the money illusion – you know the name of the blog – where workers don’t see a zero percent pay raise during 1% deflation as a pay raise. Also, you are the one looking at a graph showing 3% increase in pay during a period of less than 2% inflation and wringing your hands about the 70s and how there isn’t slack in the labor market and oh boy do we need reforms because of the low unemployment.
6. January 2017 at 16:25
Scott,
This seems like a very reasonable post. I would expect a fair number of people never returning to the workforce, after such a big downturn and long, slow recovery. Long-term unemployment ends many working careers, and we know there are also secular reasons for having a lower employment-to-population ratio as well.
The wage growth is the give away.
6. January 2017 at 16:29
Professor, this is one of the things I don’t understand- if you claim that monetary policy is very effective, as you do, how can you say that it has no impact on the growth of real wages if almost every time unemployment gets to the point where labor can demand more in wages, the Fed starts hiking rates and tightening policy in order to prevent that?
If you think monetary policy is effective why shouldn’t you think monetary policy can effect both the total output in an economy and the distribution of output in that economy? It seems to me that you should take one side or the other in that choice.
I mean why maintain a viewpoint that the Fed can influence things in the short run but cant influence things in the longer term? Why wouldn’t a series of monetary decisions made, month after month (that you believe cause changes in a series of short runs, month after month), affect the long term situation?
It seems to me that you blame both the Great Depression and the recent Great Recession on very bad monetary policy. If you are right about that then monetary policy has obvious long term effects.
6. January 2017 at 16:52
Scott,
A couple of things.
1. A faster path to a higher trend growth rate will lead to higher wage growth. So theoretically, maybe ongoing stimulus but applied more slowly?
2. It would be interesting to see a breakdown of wage increases by sector. With sticky wages, you could certainly see aggregate wage growth even though there is slack in the overall market.
3. With the right supply side measures (ones which encourage capital formation and higher labor productivity), seems like it’s possible for there to be a shift in the optimal policy mix which includes more monetary stimulus.
I’m not arguing that the economy needs more stimulus, but I think you’d need to look at the factors above before drawing any definitive conclusions.
6. January 2017 at 18:57
Isn’t it great what the greatest bubble in human history can accomplish unsustainably?
You mean there is no further need for unlimited money printing? NOW?
Super secret: The level of employment has NOTHING to do with how much money and spending their ought to be.
Wen the bubble bursts, I will blame Sumner and his ilk the same way he and his ilk were responsible for the last crash.
6. January 2017 at 18:58
*there
6. January 2017 at 19:03
Jerry, if you’ve read this blog, you’ll know that Scott has many times identified as a moderate supply-sider.
As for whether the fed can affect things long term: no, productivity does.
If you’re at full employment, injecting money into the system without the ability to produce more goods just means inflation. See: the 70s. If the market is clearing (full employment; goods sold and produced in equal quantities), how could more money help? You’d be buying more goods than are produced, which is impossible. Hence inflation.
When we’re not at full employment, the economy will adapt to whatever monetary shocks occurred and (eventually) reach full employment.
Monetary policy is very good at a specific thing: helping the economy adapt to monetary shocks.
Everything else is supply-side.
6. January 2017 at 19:39
Scott,
I’m not saying the following critique is applicable here, but in principle couldn’t it be? I am just making sure I understand your worldview.
==> “Hey Sumner you are reasoning from a price change! In general we can’t look at movements in wage rates to deduce anything about monetary policy. For all we know, there were other factors that caused the supply of labor to shift left, driving up the equilibrium wage rate. It’s possible that NGDP growth falls at the same time that nominal wage growth accelerates, meaning that the Fed could be implementing a passive tightening even when others are concluding the opposite from looking at the labor market.”
6. January 2017 at 19:59
Almost impossible is still not impossible. The supply side is global. Just look at Japan. BoJ is still not hitting its target of 2% after running the printing presses day and night for years. There is still more the Fed can do besides sit around dreaming up ways to justify economic asphyxiation and inflation fear mongering. I can think of about 100 million or more people who would be much better off today if the Fed did not consider 3% core inflation as the apocalypse when trying to cure it resulted in a situation that was much worse.
6. January 2017 at 20:14
“The labor market is clearly tightening”
Actually the correct statement to makes that the labor market HAS TIGHTENED.
You cannot infer the future trends will replicate past trends. That is the fallacy of induction. It could, but it won’t be because of what has already happened.
6. January 2017 at 20:38
Historical wage growth rate is twice that of what is shown in the chart. That still feels like slack to me.
6. January 2017 at 20:38
Here’s a link: http://www.tradingeconomics.com/united-states/wage-growth
6. January 2017 at 22:09
Daniel Ivan Harris, thank you for the reply, and I have read this blog for years now. None the less, I have some doubts and questions.
You say when we are not at full employment the economy will adapt and eventually reach full employment. I say that is a belief not a fact. I would point to Keynes’ theories about why economies will not necessarily return to full employment in any bearable time frame without intervention.
I think what condition an economy is in sometime in the long term has a lot to do with the condition the economy was in just before that time, and just before that time, and just before that time etc. And I think that Fed policy probably has some influence on each of those time periods.
So I want to add those shorter term periods together and think that they influence the long term. If this is a fallacy of composition, I need to learn why- so I am asking.
I agree that productivity is important- see my comment at 12:10. But I also wonder if full, full employment can lead to increased productivity. Maybe that is just too optimistic on my part, but I would like to see really full employment anyway just to test that out. I mean full employment is not usually considered a bad thing by most citizens of any country, so why not go for it?
7. January 2017 at 04:42
Scott
You need help. Relying on journalists and the rest of the crowd leads you to dashing off pieces like this post and to big mistakes. Average Weekly Earnings YoY growth for Production And Nonsupervisory Employees fell from 2.1% to 1.9%. “Almost no slack” makes almost no sense.
http://ngdp-advisers.com/2017/01/06/given-less-stellar-employment-data-earnings-get-limelight/
Your chart is for the relatively new series of All Employees: Total Private that adds c20mn employees to the much more established P&N Employees total of c100mn. These 20mn earn an average of $85k per year for whom the concept of AHE is pretty meaningless, rendering the AHE series meaningless too. For the record both series show employees working less hours per week (AWH) even as the AHE rises. Hence the flat or falling AWE growth.
https://fred.stlouisfed.org/graph/?graph_id=311593&rn=6086
https://fred.stlouisfed.org/graph/?graph_id=352824&rn=4328
7. January 2017 at 04:50
Many of you are missing the point. Read what Scott actually wrote. The title states there’s almost no slack. He didn’t say there was absolutely no slack.
His point is that any remaining slack will soon be gone, without looser monetary policy, ceteris paribus. Surely he’s correct.
Besides, how much slack do some of you think remains? U3 is only about .3% above the prerecession low.
7. January 2017 at 05:59
One restaurant owner I know has openly bragged about making her salaried workers put in 12-hour days, 6 days a week (and often be called in on day 7) and how it works out to less than minimum wage.
Without the bragging part that’s a textbook example what will happen when you enact minimum wages. How people can be surprised by this is beyound me. This is not an example of underregulation but of overregulation.
7. January 2017 at 06:57
Daniel Ivan Harris @19:03,
You have a good point about policy that I mostly missed earlier. I agree that when full employment is really reached that further monetary stimulus will just be inflationary.
I guess I have a difference of opinion about what constitutes actual full employment and where we are in relationship to that. And maybe an overly optimistic view of what effect rising wages will have on productivity. Thanks for your explanation.
7. January 2017 at 08:09
Cyril, The ratio has been declining since 2000. There are many theories as to why.
Benny, You are in way over your head. This post has no bearing either way on whether people “deserve” a pay increase, it’s about monetary policy. The Fed doesn’t go around deciding if workers deserve a pay increase. If you want a pay increase you should advocate tight money.
Jerry, What sort of monetary policy do you think could raise real wages, easy or tight? And why do you think it would affect long run real wages?
dtoh, You’d need actual evidence for those claims before concluding that monetary stimulus is needed. I see zero evidence.
Bob, Yes, I am reasoning from a price change, and I have many posts explaining why I do that for wages. The basic assumption is that nominal wages are sticky. If they were not, I’d agree with you. Because they are sticky, I use a disequilibrium model for wages, not the normal S&D model.
Don, It may “feel” that way to you, but historical averages are not relevant to the question I am considering here. It’s the second derivative that matters.
James, I’m not interesting in average weekly earnings, either production or all workers. I’m interested in hourly earnings.
7. January 2017 at 08:25
Scott,
I’m not saying there’s any evidence but it seems to me that you would want to do a deeper dive before analogously drawing the opposite conclusion especially when you’ve seen a major drop in the labor force participation rate due to an extended and deep recession and when there’s been a substantial change in the dynamics and composition of the workforce.
7. January 2017 at 08:37
Scott,
Oh and by the way regarding the first point, there’s no question that if you have faster demand growth you’ll have higher inflation. That’s just basic economic logic. No need for evidence to support that
7. January 2017 at 08:42
People are saying the same about the UK. I know what full employment looks like in the UK, this is definitely not it.
7. January 2017 at 09:03
If the AHE you quote is a meaningless statistic, are you still interested? How do you think AHE is calculated? I’d be interested to know.
AWE is telling us wage growth is flat as a pancake.
7. January 2017 at 09:33
while in theory the labor market is tightening up. but considering that wages have only recently been going up (great for business. except for that lack of customers, with money to pay them). course it maybe that wages wont grow because if the need to compete with low cost country wages. in which case wages wont grow (which impacts the potential for customers) and reduces sales. but at least the broad gauge for labor conditions is showing a good labor market. course it has done that before with little to no wage growth
7. January 2017 at 10:28
“What sort of monetary policy do you think could raise real wages, easy or tight? And why do you think it would affect long run real wages?”
Professor, you gave me an easy question. The answer as far as monetary policy goes is NGDPLT with a somewhat higher target than where we are at now. Some where around 5% nominal income growth. You yourself said you think RGDP will be around 1.5% with 2% inflation. Am I right that that would be 3.5% NGDP growth? That is too low.
Why that would affect real wages is more difficult and may well be a product of my wishful thinking. It has to do with some of the things I mentioned earlier.
About where we are tomorrow having a lot to do about where we are today.
And about rising nominal wages as demand for labor increases near to the existing supply of labor (as measured by the employment to population ratio) pulling more people into the supply of labor.
And about increasing labor costs spurring companies to manage their labor more efficiently and increasing the incentives to invest in labor saving technology and innovations that increase productivity.
And something about Verdoorn’s Law being more than just possibly true.
And while I might be wrong about these things, what would be the consequences involved? Slightly higher employment with somewhat higher nominal wages with somewhat higher inflation. I realize very few people like inflation, and that unexpected jumps in it can be a cost, but I consider moderate inflation to be a cost such as fire insurance is a cost. I recommend that we bear that cost.
I often think you give your idea of NGDPLT too little credit as far what good policy can accomplish.
7. January 2017 at 12:28
There’s maybe like a point and a half worth of labor market slack, but no more.
“There is no longer any respectable argument for monetary or fiscal stimulus.”
-Looks like it.
“Time for supply-side policies, beginning with a repeal of those idiotic overtime rules. Then on to tax reform.”
-Tax reform’s good, but I’m actually a fan of those overtime rules. Overworked people are bad for America, and these rules increase employment. If Trump’s goal is “jobs, jobs, jobs”, there’s no good reason to get rid of them.
The key problem in this economy is weak productivity.
7. January 2017 at 12:47
Also, Sumner, why do you think the Atlanta Fed series is better than the BLS’s Average Hourly Earnings of Production and Nonsupervisory Employees? The former measure focuses on people (thus, the “requirement that the individual has earnings in both the current and prior year”), the latter focuses on what firms pay to workers both newly hired and not.
7. January 2017 at 12:51
Jerry; you don’t have much of a basis for your claims; monetary policy in the 1930s was poor, yet, long run real wages soared.
7. January 2017 at 16:29
Dtoh, You said,
“Oh and by the way regarding the first point, there’s no question that if you have faster demand growth you’ll have higher inflation. That’s just basic economic logic. No need for evidence to support that.”
Actually, faster economic growth is likely to lead to lower inflation. Draw an as/ad curve, shift AS to the right, and observe the impact on P. You are reasoning from a price change.
Britonomist, Actually you do not know what full employment looks like. It doesn’t mean what you think it means. Economists have very specific definitions, which do not correspond to everyday speech. It does not mean “strong labor market, like back in the 1960s or late 1990s.”
James, It’s possible that AHE is flawed, but you can’t beat something with nothing. Weekly wages are not relevant here. They are not sticky.
Harding, You said:
“and these rules increase employment.”
No, they decrease employment.
The AHE series seems to be the most comprehensive, but I have an open mind on whether it’s best. If another series can be shown to be better, I’ll gladly shift to it.
7. January 2017 at 18:58
Poor Sumner, a mile wide and an inch deep, like the roots of those desert cacti. Sumner’s at the AEA, trying to reinforce his priors, and then tries to respond to each of his deluded readers who think money is not neutral and believe in sticky prices, money illusion. Delusion. Or like Whack-A-Mole.
7. January 2017 at 19:14
Scott, I was actually thinking about writing “and we’re not talking about a supply shift” in my comment because I suspected you would respond exactly the way you did.
7. January 2017 at 19:48
I’m actually a fan of those overtime rules. […] If Trump’s goal is “jobs, jobs, jobs”, there’s no good reason to get rid of them.
Sounds a bit like socialist states where they split jobs until everybody got one.
The key problem in this economy is weak productivity.
How does this go together with regulations like overtime rules? It simply doesn’t.
7. January 2017 at 20:34
Overtime rules are the worst problem in America?
Egads.
How about property zoning, or the ubiquitous criminalization of push-cart, truck or motorcycle-sidecar vending?
Gigantic and permanent rural subsidies?
The federal ukase that 10% of gasoline be ethanol?
$1 trillion a year for “national security”?
Gadzooks.
The 1970s?
Great decade, disco is still great dance music. Real GDP expanded by 20% in four years after 1976 recession.
When was the last time an the US economy expanded by 20% in four years?
So…let’s look at real growth 1970s vs. real growth since 2008…..
7. January 2017 at 22:08
“Sounds a bit like socialist states where they split jobs until everybody got one.”
-Don’t they have similar measures in Germany and Austria during recessions?
“How does this go together with regulations like overtime rules? It simply doesn’t.”
-Sure it does. Workers today are often overworked. Reducing their hours worked would incentivize firms to hire more workers and to boost output per work-hour.
7. January 2017 at 22:36
“So…let’s look at real growth 1970s vs. real growth since 2008…..”
-Baby boomers exiting v. entering the labor force. 1970s was just as bad for productivity as post-Great Recession.
8. January 2017 at 02:19
Harding, you young punk:
Output per hour rose 20.9% Q1 1970 to Q1 1980.
Output hour is up 11% since 2008.
You probably listen to some sort of crud-music on your headphones, or endure involuntary arm spasms when listening to Teutonic martial marching bands.
Disco through big speakers with a mirror ball is the way to go.
Grow up, you little punk.
https://fred.stlouisfed.org/series/OPHNFB
8. January 2017 at 06:35
In supply-side news;
http://www.nydailynews.com/new-york/manhattan/nyc-culinary-staple-china-fun-shutters-blaming-over-regulation-article-1.2939156
————–quote————-
Albert Wu, whose parents Dorothea and Felix owned the eatery, said the endless paperwork and constant regulation that forced the shutdown accumulated over the years.
“When we started out in 1991, the lunch special was $4 a plate,” he recalled. “Now it’s $10, $12. The cost of doing business is just too onerous.
Wu cited one regulation where the restaurant was required to provide an on-site break room for workers despite its limited space. And he blamed the amount of paperwork now required — an increasingly difficult task for a non-chain businesses.
“In a one-restaurant operation like ours, you’re spending more time on paperwork than you are trying to run your business,” he griped.
Increases in the minimum wage, health insurance and insurance added to a list of 10 issues provided by Wu. “And I haven’t even gone into the Health Department rules and regulations,” he added.
————–endquote————–
The anti-soup Nazis!
8. January 2017 at 08:21
OECD is prjecting 5.5% ngdp growth fo the US in 2018. Some views expressed here that 3-5 to 4.5 is “the new normal”, then it is time to tighten. What happened to “long and variable leads” that market monetarists are so fond of? I know OECD projection is not a market, but what are the true market indicators saying about future NGDP growth?
8. January 2017 at 08:22
here is the link
https://data.oecd.org/gdp/nominal-gdp-forecast.htm
8. January 2017 at 11:35
“Output per hour rose 20.9% Q1 1970 to Q1 1980.”
-Aw, gimmee a break, Cole, you know as well as I do that most of that occurred between Q1 1970 and Q1 1973. That can hardly be considered a part of the 1970s, since it included Nixon’s 1972 landslide, which, by any reasonable chronology, took place in the late 1960s -certainly not during a period of high inflation. Stagflation began in ’73.
8. January 2017 at 15:00
“Britonomist, Actually you do not know what full employment looks like. It doesn’t mean what you think it means. Economists have very specific definitions, which do not correspond to everyday speech. It does not mean “strong labor market, like back in the 1960s or late 1990s.””
Patronising much? I didn’t even tell you what I thought it meant – and I’m fully aware that economists have specific definitions given I’m a bloody post graduate in the subject, where these definitions were drilled into me every week.
8. January 2017 at 15:14
There is some evidence from stock market returns that the stock market likes inflation to be around -1% to 4%/yr, see this report, quite good as is all of Credit Suisse reports: https://www.credit-suisse.com/us/en/about-us/research/research-institute/publications.html – Credit Suisse Global Investment Returns Yearbook 2013 -(“there also still appears to be significant external dis-inflationary forces: improvements in industrial automation (robot density in emerging markets is just 5% of developed markets), growth of the internet (5.8% of retail sales in the USA and growing at a 23% CAGR, which pushes down retailers’ margins), and less supply-constrained commodity markets (with the capex to depreciation ratio for both oil and mining companies being over 3x). Anything below or above this range seems to be bad for stocks.
However, this is for the stock market which does not always correspond to any particular reality (stock returns and country growth rates are not always correlated, except in the USA, UK).
8. January 2017 at 16:38
Has conventional macroeconomics become ungrounded from the practical realities of the modern-day economy?
What the highly intelligent Scott Sumner calls “full employment,” the body politic calls “Time to elect on Don Trump.”
8. January 2017 at 17:27
Scott,
I still think you are dismissing my concerns too quickly. At the very least, I think it might help people if you spell this out a bit more. (To be clear, I’m not claiming you are caught in a contradiction, but I just think this is pretty subtle.)
I *think* your position is something like the following:
[Bob’s paraphrase of Sumner’s position]: “If wages were perfectly flexible then we wouldn’t have business cycles, at least as we know them in the modern era. However, for various reasons, nominal wages are sticky downward. So if the market-clearing nominal wage rate should fall (for whatever reason), then actual nominal wages will stay flat over time, and we will have prolonged, involuntary unemployment–what everybody calls a ‘recession’ or ‘depression’ if it’s really bad. Now in that context, once we see nominal wages starting to rise after a slump, it must not be the case that the market-clearing nominal wage rate is below the actual nominal wage rate. (Otherwise, why would we observe the actual nominal wage rising?) So at that point, we don’t have to worry about involuntary unemployment, and there is no longer any case for fiscal/monetary measures to address the market failure.”
I realize those might not be the words you would use, but is that in the right ballpark Scott?
So, assuming that’s the case, I’m still asking: Isn’t it at least theoretically possible that this is a bad example of reasoning from a price change? For example, suppose you’re in a bad depression where the nominal wage rate is stuck above the market-clearing one. Then some government measure is imposed (maybe a tax levied directly on workers) that makes the supply curve of labor shift left. So we observe actual nominal wages rise, but even when the dust settles, the market-clearing nominal wage is still below the actual nominal wage. But then policymakers erroneously conclude that there is no longer any slack in the labor market and they tighten, making the situation even worse.
To repeat, I’m not saying this *is* what’s going on right now, but is something like this at least possible, in your framework?
8. January 2017 at 17:55
Bob Murphy, Scott,
I think there is certainly a possibility that the prolonged recession and/or “government measures” may have had a dramatic effect on the LFPR with a long lagging effect, AND that to reverse the LFPR decline it may take a more extended period of stimulus than what you would normally expect in a recovery.
Not saying this is necessarily the case, but at a minimum, it would be useful to understand more fully the reasons for the drop in the LFPR and the shift to part time work before drawing any conclusions about the state of the labor market
However, I think Scott may be reluctant to entertain this argument because it could contradict previous posts criticizing Trump’s emphasis on the LFPR.
Scott, not meaning to be overly critical here, but I think your views on Trump sometimes cloud your normal objectivity. Just a thought.
8. January 2017 at 20:57
@Bob Murphy – you’re begging for attention from Sumner, with a nuanced post; that’s not a good recipe for success in getting Sumner’s attention. Sumner only answers straw men he thinks he can destroy. But you’re right in one thing: “[Bob’s paraphrase of Sumner’s position]: “If wages were perfectly flexible then we wouldn’t have business cycles” – yes, Sumner, like many an economist, thinks he can and we should abolish the business cycle. The holy grail of foolish little economist minds through the ages.
8. January 2017 at 22:38
Add on: has there ever been a consensus of leading US macroeconomists that the next year would bring a recession? Is not predicting a recession the province of doomsters and cranks?
So…should the Fed raise rates? Tighten money even more?
What is the value of the conventional macroeconomist who says there will not be a recession in 2017?
9. January 2017 at 02:04
The holy grail of foolish little economist minds through the ages.
Like R.E.L.?
In the 2003 presidential address to the American Economic Association, Robert E. Lucas, Jnr of the University of Chicago said:
“My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”
http://home.uchicago.edu/~sogrodow/homepage/paddress03.pdf
9. January 2017 at 06:26
“LK, On NGDP growth, 4% is likely to lead to the next recession coming sooner than 3.5% growth.”
I see your point. Slow and steady she goes. In some sense Bernanke/Yellen/Obama might have set-up what will be one of the longest economic expansions in history (hoping, of course, that the Fed doesn’t over-offset the upcoming GOP deficit spending).
9. January 2017 at 07:56
Scott you troll so well! By putting deserve in quotes you imply that you are quoting me. But I said no such thing. Impeccable straw man I applaud you. Next you make the casual argument that pay only goes up through tight money which we both know is not true. When I attack that line of reasoning you will say something like “I never said Only” and then the red herring will be complete.
Rather, if you think that the labor market is tight and we are at the point where stagflation is poised to strike you should maybe present evidence for it.
9. January 2017 at 09:27
OK Scott, you inspired me to write a blog post on your claims. No offence!
http://ngdp-advisers.com/2017/01/09/bedazzled-2-9-wage-growth/
9. January 2017 at 09:32
Workers care about nominal wages, especially when they’ve got nominal debts left over from when NGDP was reliably level-bound to 5% per year.
So much for not reasoning from a price (of labor) change. Sad.
9. January 2017 at 10:01
I fear the next NGDP shock (2008 again)
9. January 2017 at 10:24
The wage statistics can be misleading. In 2008 after all, they went up considerably. The workforce skewed towards the more productive.
The prime-age employment/population ratio still shows only a 60% recovery in employment back to early 2008 levels. Prime-age E/P went from 80% to 75% and now up to 78%.
https://data.bls.gov/timeseries/LNS12300060
Something just seems off here with claiming that the labor market is tight. A useful counter-factual would be: if 2000-2016 had consistent, 4% inflation level target, would we still have this decline in labor force? What if the Fed had consistently hit 4% inflation level targets from 2009?
I just don’t see the prime-age employment and work force participation following the same path. IMO, 1970’s stagflation happened due to higher unionization and a very different workplace culture. 1970’s unions were guaranteed or always demanded at least a COLA. Even the non-unionized workforce had larger, more regimented employers with expectations of COLA’s. With REAL wage stickiness, supply-side inflation led to unemployment regardless of inflation levels.
The economy is much different today. I definitely would not push more than 4%. Maybe I wouldn’t push more than 3%. But the de facto 1-2% inflation target certainly hurts declining areas and industries with nominal wage stickiness.
9. January 2017 at 10:33
Hasn’t the minimum wage been going up in most cities/states? Is a mandated price increase a signal of a tight labor market? Never reason from a price change!
9. January 2017 at 11:45
“Why is the percentage of 25-54 year olds employed still below pre-recession levels and well below what it was in the late 90s?”
The late 1990s level was the historic peak in a major economic boom.
Why was the percentage employed lower than that at all other times before and after?
https://fred.stlouisfed.org/series/LREM25TTUSM156S
“It was 79.7% in Dec. 2007 and is now 78.2%.”
The NBER dates the last expansion as *peaking* in December 2007.
So you are saying that the current employment rate is higher than at the last peak, as evidence that it is low?
9. January 2017 at 12:07
I am at the AEA meetings…”
Among the exasperated elite?
~~~~
Top Economists Grapple With Public Disdain for Initiatives They Championed
Economic conference in Chicago takes on exasperated tone
http://www.wsj.com/articles/top-economists-grapple-with-public-disdain-for-initiatives-they-championed-1483916701
9. January 2017 at 13:46
http://www.econtalk.org/archives/2017/01/robert_hall_on.html
‘Robert Hall: Okay. But then if you ask, ‘What would happen if Alan Blinder,’ who has been very vocal in The Wall Street Journal on this, and others, including me, but not so much in print, said, ‘Well, that’s a silly policy. Let’s change the 50 basis points [interest rate we’re paying on excess reserves] to 0.’ Then banks would look around and they’d say, ‘Ah! Now I’d really like to invest.’ And so they would start, as you were saying. It’s, ‘I’m not getting the market return from reserves any more. I’ll try to get rid of them.’ But every time they try to get rid of them–which they do aggressively. But the reserves always land at some other bank. If you buy something–if you make a loan, then the funds are deposited in someone else’s bank account; and that means that the corresponding reserves are moved to that person’s bank. There’s nothing the system can do.’
QTM RIP!
9. January 2017 at 14:16
Yglesias: “In crucial ways, Donald Trump is the second coming of George W. Bush”
http://www.vox.com/policy-and-politics/2017/1/9/14161740/trumponomics-bushonomics
9. January 2017 at 14:44
TravisV,
I think Ygkesias is right and if you want an even more superficial analysis they are both businessmen who were bankrupts and are teetotalers. So far the track record for MBA businessmen is pretty bad.
9. January 2017 at 20:42
“Obamacare Repeal Might Have Just Died Tonight”
http://nymag.com/daily/intelligencer/2017/01/obamacare-repeal-might-have-just-died-tonight.html
10. January 2017 at 02:24
Not what conventional macroeconomists projected:
“The UK pound slumped to $1.21, down about 19% against the U.S. dollar since the Brexit, the UK referendum to leave the European Union. The FTSE 100 index in London hit an all-time high in early Tuesday trading.”
—30—
An all-time high?
10. January 2017 at 05:33
It could be worse for the economists;
http://www.latimes.com/entertainment/la-et-golden-globes-2017-live-watch-all-of-meryl-streep-s-1483932724-htmlstory.html
‘Thank you, Hollywood Foreign Press. Just to pick up on what Hugh Laurie said, you and all of us in this room really belong to the most vilified segments of American society right now. Think about it: Hollywood, foreigners and the press.’
10. January 2017 at 06:47
“all of us in this room really belong to the most vilified segments of American society”
Hollywood flattering itself at a gala fete, as per usual.
10. January 2017 at 07:15
R-gDp growth is decelerating. R-gDp has been decelerating since the 3rd qtr. of 2016. The trough is the 2nd qtr. of 2017. Then, in the 3rd qtr. 2017, the bond vigilante’s will prevail.
Real medium household income was lower in Nov. 2016 $58,221, than in in Jan. 2000 @ $58,410 (notwithstanding the Phillips curve has been denigrated).
http://seekingalpha.com/article/4033514-real-median-household-income-slow-growth-2016
Monetary policy should now be tightened (long-term monetary flows reversed in Dec. 2016) and the DFIs driven out of the savings. The 1966 S&L credit crunch is the economic paradigm. Then, instead of new money, which is not matched by an offsetting increase in the growth of product and service output, existing savings will be promptly activated, exigently and sagaciously deployed, and matched with real-output. In fact, most DFI lending/investing is for existing assets (thereby inflating them).
There are $10t + un-used, and un-spent savings (an unrecognized leakage in Keynesian National Income Accounting), pooled and bottled up in the payment’s system (largely non-M1 components and saved DDs). Lest you, or the ABA doesn’t understand / forget, – from the standpoint of the economy, DFIs always create new money when they lend/invest. The utilization of monetary savings increases the supply of loan-funds, but not the supply of money (it is a velocity relationship). This decreases long-term interest rates.
All savings (deposits held beyond the income period in which received) originate within the commercial banking system. As such, from the standpoint of the economy, the DFIs simply pay for what they already own. When a depositor saves and keeps his savings in a DFI, this simply results in idled deposits. But if the saver-holder is induced to transfer his funds to a non-bank conduit, no change occurs in either the volume, or the composition, of the assets and liabilities of the DFIs.
To the extent that DFIs buy their liquidity and stabilize an artificial balance of payments (redistribute existing deposits), the DFIs simply increase their cost of doing business (reducing profits) and increase the risk of default (increase the acquisition of marginal risk-weighted assets, or risk-taking beta).
– Michel de Nostredame
10. January 2017 at 07:44
Yale Professor Irving Fisher’s transaction’s concept of money velocity, or the “equation of exchange”, is an algebraic way of stating a truism; that the product of the unit prices, and quantities of goods and services exchanged P*T, is equal, for the same time period, to the product of the volume, and transactions velocity of money M*Vt.
Given that the symbols in Fisher’s time series: (1) M*Vt is equal to aggregate monetary purchasing power, or AD and (2) P*T, or all economic transactions, are a proxy for N-gDp. Then, based on the distributed lag effects of the independent variables (which have been mathematical constants for 100 + years), money flows, a priori and a posteriori, are not neutral in the short or the long run. Note: “A distributed-lag model is a dynamic model in which the effect of a regressor x on y occurs over time rather than all at once”.
Monetary flows, money time’s velocity, are a mathematically robust sequence of numbers. For short-term money flows, the proxy for real-output, R-gDp, it’s the rate of accumulation (sigma Σ), a posteriori, that adds incrementally and immediately to its running total. Its economic impact is defined by its rate-of-change, Δ “change in”. The rate-of-change, ROC, is the pace at which a variable changes, Δ, over that specific lag’s established periodicity.
Fisher (1930, p.451) deduced:
When the effects of price changes upon interest rates are distributed over several years, we have found remarkably high coefficients of correlation, thus indicating that interest rates follow price changes closely in degree, though rather distantly in time.”
See: “The Purchasing Power of Money”, MACMILLAN (1920)
fraser.stlouisfed.org/scribd/?title_id=3610&filepath=/files/docs/meltzer/fispur20.pdf
As David Beckworth posted on “Macro and Other Market Musings”:
“What makes this really interesting is that these wide swings in economic activity are not matched by similarly-sized swings in the price level. Most of the seasonal boom is in real activity. Put differently, there is an exogenous demand shock every fourth quarter where prices remain relatively sticky so real activity surges. This is a microcosm of demand-side theories of the business cycle”
fred.stlouisfed.org/series/RETAILSMNSA
But what is true on the upside is false on the downside. Unless money flows expand at least at the rate prices are being pushed up, incomes will fall, output can’t be sold, and jobs will be lost. I.e., there should be a fall in retail prices after the holidays. Something N-gDp targeting marginally minimizes.
This is something Ben S. Bernanke repeatedly refutes:
Bernanke: “Finally, the R2 of the common components is particularly low for the money aggregates, being 10.3% for the monetary base and 5.2% for M2. This implies that we should have less confidence on the impulse response estimates for these variables. Interestingly, these are variables for which the impulse response functions from the two estimation methods differ the most.”
Ben S. Bernanke & Ilian Mihov: “The Liquidity Effect and Long-Run Neutrality”
“The first, the so-called liquidity effect (LE), asserts that in the short run, changes in the money supply induce changes in short-term nominal interest rates of the opposite sign. The second proposition, the long-run neutrality of money (LRN), states that changes it the money supply do not have significant effects on real quantities such as output, employment, real interest rates, and real balances in the long run.”
With respect to interest rates, the combined lags may work against, or for, one another (Bernanke et. al., don’t even consider the existence of more than one lag). An injection of liquidity might initially depress rates, given for example, either long-term or short-term money flows,-Δ, declining, or without any significant change in their calculus.
All of which is to say that the stock market averages, following the economy, is now set to drop.
10. January 2017 at 07:53
@Postkey 9. January 2017 at 02:04
“Object not found!” from your link; is U of Chi hiding something? Thanks for the quote however; it’s true Bob Lucas apparently is such a diehard of mathematical models and ‘rational expecations’ anticipating everything (a sort of modern Say’s Law) that he was speechless in 2008 when there was a panic, as it showed his models wrong. Repeat after me: human behavior is herd-like, non-linear, and hence AD (even AS, though slower) is fad-driven, is herd-like (recall the ‘smoking cigar’ craze of the late 1990s), hence you cannot treat humans like atoms of gas. The windbag Sumner should just acknowledge this and close this blog down (I am kidding of course, I enjoy flaming Sumner, he’s such an easy balloon to prick, the prick! Ouch!)
10. January 2017 at 08:03
@James Alexander – why did you close comments in your website NGDP-advisors? Afraid of the public? You make this comment: “In reply to my similar comment, Scott said that he wasn’t interested in AWE, only AHE, because only AHE show sticky wages. As we showed in this pay walled post a couple of months ago, AWE is sticky” – so you admit the data does seem to show, at least initially, that AWE is not that sticky? Examine your priors…
10. January 2017 at 12:04
why should market monetarists care about wage growth at all?
What are the indicators for expected NGDP growth? Dependending on those, 0% wage growth or 5% wage groth means close to nothing …
10. January 2017 at 13:22
Jose, your question could be rephrased as why should an economist care about the changes in what constitutes a very large percent household income? NGDP is ultimately the same thing as household income, and a large percentage of that is wages. In addition wages are the primary income for a large percent of the population.
10. January 2017 at 16:57
Jerry Brown,
A big difference between NGDP and wages is NGDP has a big component for TOTAL wages. Scott posted AVERAGE wages. The two diverge if the workforce skews more towards the more productive, like in 2009. The wage increase can also be influenced by relative reduction in employer benefits.
Finally, even total wages can go up by taking from capital’s share rather than an increase in NGDP.
I have to agree with Jose that using wages in place of NGDP here is odd. Does Scott believe it to be a leading indicator, showing impending inflation and NGDP growth faster than looking at those indicators directly? That’s an odd, and I think incorrect, argument.
10. January 2017 at 19:26
dtoh, Supply shifts are not just theoretical possibilities, they are the most plausible way that Trump might boost growth.
Christian, You said:
“Sounds a bit like socialist states where they split jobs until everybody got one.”
Yup, and you could have added “How’d that work out for France?”
Britonomist, Then don’t just tell me what you think it looks like, give me the specific data that leads you to that conclusion. You did not do that.
Bob, A decrease in supply due to something like a higher minimum wage causes the natural rate of unemployment to rise. In that case, we don’t have full employment in the everyday meaning of the term, but we still may be at full employment in the technical sense used by economists—the sense in which France’s natural rate of unemployment is around 9%, Italy’s is around 11%, and Spain’s is around 15%.
More broadly, I certainly agree that I am reasoning from a wage change, and as always in macroeconomics, any single data point can be misleading. That may be true here as well. But at least I have model here that goes beyond simple S&D, it’s a model of how sticky wages adjust over time. There are other data points like quit rates that also point to a strong labor market, as well as an increasing number of firms claiming they cannot find workers, even in fields like construction. There is also theory–sticky wages should have adjusted by now. There is the 4.7% unemployment rate. It’s not just one data point suggesting not much labor market slack.
The phrase “reasoning from a price change” usually refers to people drawing quantity conclusions from price data. I am not doing that, I’m drawing disequilibrium conclusions from the second derivative of prices. It’s not quite the same.
dtoh, I’ve said all along that most of those workers are never coming back, and I stick with that prediction. And see my response to Bob.
You said:
“However, I think Scott may be reluctant to entertain this argument because it could contradict previous posts criticizing Trump’s emphasis on the LFPR.”
Not likely, give that I don’t recall a single Trump statement even mentioning the concept.
Benny, You said:
“Those damned employees are getting raises! Better put a stop to that! We wouldn’t want men to get their first pay raise in 7 years and the first overall wage gain in 15”
And then you throw a fit because I suggest you were claiming they deserved a raise. Sorry, I thought you were being sarcastic, I didn’t know you really are dismissive of the view that they deserve a raise after 15 years. I wonder how Ben Cole interpreted your comment. Ben??
Justin, How many workers still have pre-2008 nominal debts? And what about their nominal assets? It’s a valid point you made, it just doesn’t seem that relevant today.
Travis, Thanks, I’m not optimistic that the GOP will improve Obamacare.
10. January 2017 at 19:27
Matthew, No, it’s not a leading indicator, it helps us to understand if the labor market is still adjusting to a previous drop in NGDP.
10. January 2017 at 21:05
OT, Scott Sumner, in his blog post here: http://www.themoneyillusion.com/?p=31773 blasted the Swiss central bank for devaluing the Swiss franc in early 2015. Yet on p. B5 of the WSJ today it is reported that the Swiss central bank made a profit (I know, it’s immaterial since a bank can ‘print money’ say the monetarists): “ZURICH—The Swiss National Bank posted a strong profit for 2016,rebounding from a steep loss the previous year, as a stable franc and increases in the value of stocks, bonds and other assets improved its financial position. The SNB’s said its profit was more than 24 billion Swiss francs ($23.6 billion) last year, compared with a paper loss of 23.3 billion francs in 2015 and a 38 billion francs profit in 2014.”
In Sumner’s twisted world, if an economy recovers naturally, the central bank ‘did it’; ditto if the economy craters. Akin to the Keynesians, Sumner believes government steers the economy. A more foolish little man I’ve never met in my entire life.
As for the Swiss economy post-devaluation, lookey here: http://www.tradingeconomics.com/switzerland/gdp-growth Switzerland had a drop in Q1 when it devalued, probably related to their devaluation since they are a trading economy (as The Economist said 1/18/2015: “The big question now is how much the removal of the cap will hurt the Swiss economy. The stockmarket fell because Swiss companies will now find it more difficult to sell their wares to European customers”), but after some necessary Schumpeterian pain, there’s been gain, and it’s been up-up-and-away since then. What does Sumner say about this? I’d like to know in a future column.
Does the Swiss economy falling after devaluation prove money is not neutral? It seems so, but it could also be a coincidence, see the ups-and-downs of Swiss GDP in the link above. In any event, the Swiss devaluation was a natural experiment: when the central bank devalued, the Swiss economy seemed to take a hit, but only for a quarter or three, then it was back to business. The ‘long run’ seems to be, even by Sumner’s own reckoning, about one year. So why is Sumner harping about what the Fed failed to do in 2008 as an excuse for why the US economy is in the doldrums today? Bizarre, but that’s Scott’s middle name.
11. January 2017 at 09:18
Postkey, You’re not even trying to make your asinine posts relevant, are you?
11. January 2017 at 13:28
Ray, You said:
“OT, Scott Sumner, in his blog post here: http://www.themoneyillusion.com/?p=31773 blasted the Swiss central bank for devaluing the Swiss franc in early 2015.”
That’s the old Ray! No, I never did anything of the sort, but it’s funny that you think I did.
11. January 2017 at 13:49
@Sumner – ok, I stand corrected, I guess you did not write these words in your Swiss blog post: (Sumner): “Back in January 2015, the SNB foolishly allowed the SF to suddenly appreciate against the euro (by roughly 14%), after capping its value at 1.2 for about 3 years.” Foolishly implies ‘blasts’, as I said. You should write about how the Swiss experience in Q1 of 2015 is evidence of money non-neutrality, but I suppose you think that money being strongly non-neutral short term is obvious (it’s not).
12. January 2017 at 06:20
And so Ray doesn’t know the difference between appreciate and depreciate. It’s all the same to Ray.