Archive for the Category Labor markets


Amazon is not a macro phenomenon

I noticed a new post that pushed back against my claim that slow NGDP growth explains slow wage growth:

Amazon Has Become A Macro Phenomenon

.  .  .  There is no shortage of explanations on why low unemployment isn’t sparking any wage (and subsequent price) inflation, for instance, here are two of the most common explanations:

  • Low productivity growth
  • Low nominal growth and hence low inflation expectations

.  .  .

More convincing is Scott Sumner’s explanation that it is simply the result of low inflationary expectations, which keep wages in check. We see this even more in Japan, where the labor market is arguably considerably tighter but wages simply fail to take off.

The Amazon effect

But there could be another explanation, which centers around the huge size and growing influence of the online (and increasingly offline) behemoth called Amazon (AMZN).

Perhaps like Wal-Mart (WMT) before, Amazon exerts downward pressure on both wages and prices by its sheer scale and efficiency.

There are three problems with this explanation.  First, while rapid productivity growth in retailing might hold down inflation (if the Fed were targeting NGDP), it would not hold down wage growth.  Second, the Fed is targeting inflation, so rapid growth in productivity should boost NGDP growth, not reduce inflation.  And third, productivity growth is actually quite slow.  Although Amazon is an impressive company, it’s just a tiny share of GDP.

The economy is really, really big.  Don’t use micro reasoning to think about macro phenomena.

I keep going back to NGDP.  NGDP (i.e. monetary policy) explains the slow wage growth.  Period.  End of story.

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.

The labor market will recover, with or without the Fed

I recently read by a paper by Laurence Ball, which advocated the use of a “high pressure economy” to bring the unemployment rate down to low levels. I’m generally opposed to that sort of policy, as I believe it leads to a procyclical monetary policy—high inflation during booms and low inflation during recessions. That makes the business cycle more unstable.

I initially assumed that it was a recent article, but rereading the piece I saw it was actually from March 2015. That provides slightly more justification for an expansionary monetary policy, but it also raises another interesting question. Consider this prediction:

FOMC members want to accommodate this return to long-run equilibrium while avoiding an overheating of the economy that would push inflation above target. Based on FOMC statements, it appears likely that the Fed will pursue its goals by raising short-term interest rates above their current near-zero levels at some point around the middle of 2015.

This essay argues that a different path for monetary policy would be better for the economy. The Fed should seek to push the unemployment rate well below 5%, at least temporarily. A likely side effect would be a temporary rise in inflation above the Fed’s target, but that outcome is acceptable. To push unemployment down, the Fed should keep interest rates near zero for longer than is currently expected, certainly past the end of 2015.

Notice that Ball thought it would take high inflation to push unemployment down below 5%.  Instead, unemployment has fallen to 4.3% with inflation actually remaining slightly below the Fed’s 2% target (currently it’s closer to 1.5%).

I’ve never believed in “hysteresis” theories that claim unemployment can get stuck at high levels due to a lack of aggregate demand.  I think this theory was based on a misdiagnosis of the European labor market after 1980, where the high unemployment that was assumed to be labor market slack was actually caused by statist labor market regulations.  In the US, the unemployment rate will fall back to the natural rate regardless of whether the Fed pushes inflation above their 2% target.  Thus it’s better for the Fed to focus on stable NGDP growth, and let the labor market take care of itself.

If you want more jobs (and I do), then advocate supply-side labor market reforms.

PS.  A recent piece by Paul Krugman points out that the fall in unemployment to 4.3% also refutes claims made during the recovery period that the high unemployment was partly “structural”.  I was also skeptical of the structural unemployment claim, but even I did not expect unemployment to fall quite this low.

HT:  David Lapidus

One small step for deregulation

Deregulation is harder than it looks, but the Trump administration did take one significant step this past Wednesday:

Outside of a $15 minimum wage, the fast-food industry’s big mortal fear when it comes to labor law is over classifying companies with franchise business models as “joint employers” along with their franchisees. Their fear increased substantially in 2016, following news that President Obama’s Labor Department had issued guidelines recommending precisely this classification. It’s probably no surprise, then, to learn that yesterday the new Labor Department came to those giant corporations’ rescue by deleting the Obama-era guidelines entirely.

This will continue to be fought over in the courts:

The DOL’s withdrawal doesn’t necessarily translate to an immediate win for fast-food employers, though. The guidance it removed wasn’t technically law, so judges weren’t obligated to defer to it, former Labor deputy secretary Seth Harris tells the L.A. Times. He feels, “If anything, it makes it harder for employers, because they don’t know clearly what standards they should apply.”

And it would help if they staffed the NLRB:

The NLRB has recently taken workers’ side in several joint-employer cases. The big one to watch, though, involves McDonald’s, and it’s still being challenged in court. In the meantime, there are currently two vacancies on the NLRB that President Trump gets to fill, assuming he ever gets around to it.

They also need to roll back the Obama overtime rules, which are also tied up in court.

PS.  On a sad note, one of the great innovators of the 20th century passed away:

Sam Panopoulos, considered to be the creator of the Hawaiian pizza, died on Thursday at the age of 83. A Greek immigrant to Canada, Panopoulos and his two brothers ran a number of restaurants in Ontario. Satellite Restaurant, where Panopoulos started serving pizzas in the 1960s, is the spot where he came up with the controversial assemblage of toppings. Depending on whom you talk you, it was either in a moment of divine inspiration or devilish blasphemy that Panopoulos first put pineapple on pizza, telling the BBC just this year that the crew did it “just for the fun of it.”

I say “divine inspiration”.

PS.  I also have a new post on labor shortages at Econlog.


No workers = no growth

Today’s jobs report showed the unemployment rate falling to 4.3%.  That’s lower than at any time during the housing boom.  It’s almost as low as the peak of the tech boom.  Indeed, other than during a brief period around 2000, it’s the lowest unemployment rate since the 1960s.  Even the U-6 rate is back to the levels of the summer of 2006.

So we must be producing lots of jobs, right?  No, payroll employment rose by just 138,000 in May, well below the pace of the previous 7 years.  Yes, one month is not significant, but job growth over the past three months has averaged only 121,000. Companies cannot find workers.

In 2018, we’ll look back on these job gains as boom numbers, as things are going to get even worse.  And if Trump cracks down on immigration, growth will slow to a near standstill.  The second quarter GDP numbers are expected to be strong, but don’t be fooled by that (seasonal) head fake—we are entering a very slow growth period.

After Trump was elected there was a big “reflation trade” and the 10-year bond yield rose to over 2.6%,  Today it’s down to 2.17%, as the yield curve gets flatter and flatter.  At the time, I thought people were forgetting about monetary offset. But even I missed the fact that Trump was too incompetent to get his supply side package through Congress.  I expected a few tenths of a percent more RGDP growth, now I doubt even that.

So why are stocks doing well?  In my view it’s the same story as what we’ve seen since 2009:

1.  Markets are gradually realizing that ultra low interest rates are the new normal.

2.  In the “FANG” economy, American corporations don’t need fast growth to make big profits.


1. This will end up being the longest economic expansion in American history.

2. This will end up being the weakest economic expansion in American history.

3.  Interest rates will stay low.

4.  Unemployment will fall to 4%.

5.  Inflation will stay low (because the Phillips Curve model is wrong.)

6.  Janet Yellen will end up producing the most stable rate of NGDP growth of any Fed chair in American history.

PS.  Unlike during 2008-14, there’s nothing wrong with the current stance of monetary policy—the problem is the regime.