The labor market is (very gradually) healing

Tyler Cowen has a post on the labor market, and also links to a response by Adam Ozimek.  I mostly agree with Adam, but would like to make the points in a slightly different way.  Here’s how Tyler starts out:

One striking feature of the Thursday labor market report was the mix of declining unemployment “” now down to 5.3 percent “” and continuing sluggish wages, not to mention low rates of price inflation; read Neil Irwin. Normally we would expect all the demands for those new hires to boost wages more.  What is going on?

My initial response is “All what demands for those new hires?”  I don’t see any sign of increased demand for labor, at least in the intro provided to his post.  Instead, I see an increase in the equilibrium level of employment.  And also sluggish wages.  I can think of two possible explanations, neither of which involve more demand for labor:

1.  The supply of labor shifted right, holding down wages and increasing employment.  That’s the equilibrium model.

2.  The supply and demand for labor are stable, but actual wage rates are above equilibrium due to sticky wages.  As wages gradually adjust, the horizontal sticky wage line moves downward (relative to 4% NGDP growth) and this increases quantity demanded of labor and lowers quantity supplied. Unemployment falls.  But again, no increase in the demand (curve) for labor.

So the answer to the “What is going on?” question is, “No, normally we do not expect rapid growth in employment to be associated with fast growing wages. Normally we expect fast growth in employment to occur in depressed economies, and to be associated with slow wage growth.”

I sometimes hear it argued that there is a good news aspect to this development, suggesting that the absence of wage pressures indicates there are many more people to be hired.  I wonder if this argument makes sense.  If we don’t observe a worker willing to take a job for current wages, how is that a cause for optimism about future reservation wages for those same workers?  I would think it implies some slight pessimism about whether those individuals will end up working again.  I’m not sure those workers are going to be worth so much more in the market anytime soon.

Maybe the workers are willing to take the jobs at current wage rates.  But they can’t find them due to sticky wages.  Yes, my explanation is ad hoc, but doesn’t it fit the facts?  My explanation predicts slow wage growth.  Check.  My explanation predicts total employment growing each month at a rate much faster than the working age population.  Check.  Any other explanations fit the facts that well?

And my explanation implies optimism.  If employment is growing fast BECAUSE wages are rising at a slow rate, then the longer wages rise at a slow rate, the longer employment can rise quickly. (This is Ozimek’s basic argument.)

Just to jog your memory, the data do not indicate much of a stable Phillips curve.

That’s right, the Phillips Curve model is flawed because it assumes a stable supply of labor.  And the evidence suggests that the supply of labor is increasing.

Alternatively, you might think the employment of those remaining unemployed workers is constrained by demand side forces.  I find that unlikely at this late date in the recovery but even so, this demand side hypothesis also gives no particular reason for optimism, given a very conservative Fed.

Studies suggest that downward wage flexibility is much more difficult at the zero wage rate increase bound, perhaps due to money illusion.  So there still could be a bit of residual effects from the recession, and from the unusually low rate of NGDP growth during the recovery (which itself is a sort of shock, if workers expected this recovery to be like other recoveries.) And recall that unemployment is down to 5.3%, so the vast majority of the labor market healing has already occurred. There is room for optimism because each month we get over 200,000 new jobs, which is much faster than growth in the working age population.  If wages were suddenly rising fast, we would know that we’d be close to full employment.  But that hasn’t happened yet.

Liquidity trap models do not explain why the rate of price inflation continues to be pretty much where the Fed wants it to be, and thus they also do not explain this constellation of market forces.  There is too much labor market recovery going on.

Yup, (simple) liquidity trap models don’t explain much of anything, including the inflation rate.  They don’t account for QE and other unconventional forms of monetary stimulus.

I find the most plausible explanation to be a version of The Great Reset.  A lot of workers have been revalued by the market downwards, but most incumbents are not taking pay cuts in real terms because they have insider power.  New hires, however, are not granted equally favorable terms.  If wages are steady as new hires pick up, this is in fact upward pressure relative to the counterfactual that otherwise those wages would be falling.  Flat wage are indeed what “things heated up” looks like, and it’s a good thing we had that gas price decline to bump real wages up just a bit.

Tyler’s right about the Great Reset, and this needs to be combined with the standard AD model.  It’s one reason why the recovery has taken so long; we need even more downward wage flexibility than would be the case if the labor market were not gradually moving against the bottom half of the wage distribution.  But the last sentence is probably wrong; real wages don’t matter, W/NGDP matters.  The oil price decline did not boost NGDP, and that’s one reason why MMs correctly predicted it would not speed the labor market recovery, while conventional economists incorrectly predicted it would.



44 Responses to “The labor market is (very gradually) healing”

  1. Gravatar of David E David E
    14. July 2015 at 15:56

    Increased supply of illegal immigrants, the high cost to employee low skilled workers (minimum wage, employer taxes), and increased disability payments could also be involved.

  2. Gravatar of Major.Freedom Major.Freedom
    14. July 2015 at 16:42

    Aggregate totals of employment do not convey the true health of a labor market.

    Aggregates mask the underlying reality.

    Not all equal aggregate levels of employment are equally healthy.


    Never reason from an employment change.

  3. Gravatar of Kevin Erdmann Kevin Erdmann
    14. July 2015 at 16:56

    Why, in the year 2015, are economists still acting like there is such a thing as cost-push inflation? For 35 years, the Fed has had de facto policy of declining inflation in recessions and flat or declining inflation in recoveries. There hasn’t been anything like “wage inflation” during this time. The only reason that ever seemed like it was the case was because, since de facto Fed policy is procyclical, when the Fed didn’t have a disinflationary bias, there tended to be monetary inflation coincidentally with real wage growth and high real interest rates, as the Fed tended to find its policy rate below the natural rate during these times.

    It seems to me that it is unrealistic to expect employers to raise wages in an inflationary way. People tend to scoff at employers who complain of a shortage of labor, but who don’t raise wages. But, this is rational. In a world with sticky wages, it would not be smart to bid up wages because of cyclical demand. Real wage growth has more to do with the reduced frictions in the labor market when employees can do matching and searching without fear of being locked out of the employment market.

    This continued use of “wage inflation” is so damaging because the solution is to “cool down” the economy. The only reason the economy ever needed cooled down was because procyclical and unbiased Fed policy would inevitably become inflationary during recoveries. Now, we are just cutting the legs out from under perfectly reasonable recoveries every time there is a sign of real growth. It’s infuriating.

  4. Gravatar of Ray Lopez Ray Lopez
    14. July 2015 at 18:01

    Sumner in his alternate universe again. Such sophisticated sophistry, complete with AD-AS curve shifting. But Sumner shifts the goalposts too. Notice he says “Tyler’s right about the Great Reset”, but then proceeds as if there’s no Great Reset.

    Let’s review what Great Reset means (my understanding, sans #3): it does not mean Black Death kills 33% of Europe’s population, making labor dear. It means: (1) Boomers retire, and consume less, hence AD shifts to the left, (2) less workers needed as robots take over, hence AS shifts to the right as more redundant workers, (3) costs are declining, hence there’s a beneficial deflation over the long run (see work by A.A. Walters *), (4) Boomers decide to work part-time, like me, as they’ve made enough money. Yes Jeb Bush is right in this sense.

    That’s what’s going on in the real universe with Great Stagnation and an aging population. And oh, btw, neither prices nor even wages are that sticky.

    * Professor Sir Alan Arthur Walters (17 June 1926 – 3 January 2009), British economist, Euro-skeptic; one of his most important contributions to economic theory was to demonstrate empirically that, for many industries, the costs at the high-scale end of the long-run cost curve is essentially constant or even declining. This was established in his article “Production and Cost Functions: An Econometric Survey”, (Econometrica)

  5. Gravatar of Dustin Dustin
    14. July 2015 at 18:48

    It rather seems to be a roughly equal shift in the supply of and demand for labor given that wages are static.

  6. Gravatar of Benjamin Cole Benjamin Cole
    14. July 2015 at 20:19

    Gadzooks, the frame of reference for the economic profession is warped!

    John Cochrane recently lionized a Martin Feldstein post that wages are rising, and so we are going to have inflation and how terrible it all is.

    Gee, that would be rotten, just rotten, if we had tight labor labor markets in the U.S., and for a long time.

    How would voters feel about free markets and capitalism when labor markets are tight, year after year?

    And the sniveling social welfare advocates, how would they justify their programs and their jobs, if anybody who could fog a mirror could gets job?

    And central bankers—with everybody working, how would they say that inflation was the Great Satan?

    And yes, wipe out the minimum wage, and legalize push-cart vending.

    But first, print lots of money.

  7. Gravatar of Brian Donohue Brian Donohue
    15. July 2015 at 05:24

    I agree that Adam is closer to the mark here than Tyler.

    It seems to me there are several causes, and these guys are each focusing on the part of the elephant they’re holding on to.

    Doesn’t your #1 basically echo Adam?

    And doesn’t your #2 suggest some kind of Reset, with sluggish NGDP growth making an OK-Sized Reset look like a Great Reset?

    Anyway, I like your explanation. Seems pretty obvious actually to this non-economist.

  8. Gravatar of LK Beland LK Beland
    15. July 2015 at 06:25

    Small-business polls are showing that concerns about sales are still at a historically moderately high level. Plans to expand, build inventory, to invest and future sales expectations are all at low levels :

    This sure does look like a demand-constrained economy. And the “this late in the recovery” statement seems a bit strange to me. The BoJ and the ECB clearly showed that a central bank can keep an economy demand-constrained for a long, long time. That 3.2% Hypermind prediction also points to a Fed that seems bent on (moderately) constraining demand this year.

    Also prime-aged (25-55) employment ratio has only recovered half-way. I expect that we can get at least one or two years of 200k/month job creation before it reaches mid-1990s or 2006 levels, where one might expect wage inflation to become important. Even then, with <4% NGDP growth, we shouldn't expect much of it.

  9. Gravatar of LK Beland LK Beland
    15. July 2015 at 06:30

    The Bank of Canada just cut its rate from 0.75 % to 0.5%.

    CAD/USD fell 1.4%.

  10. Gravatar of The labor market is (very gradually) healing « Economics Info The labor market is (very gradually) healing « Economics Info
    15. July 2015 at 07:00

    […] Source […]

  11. Gravatar of ssumner ssumner
    15. July 2015 at 07:29

    David, You lost me somewhere–I don’t follow your logic.

    Kevin, Yes, these myths just won’t go away.

    Ray, You said:

    “(1) Boomers retire, and consume less, hence AD shifts to the left,”

    Ah, that’s the old Ray again, confusing AD and AS shifts.

    Brian and LK, Good comments.

  12. Gravatar of collin collin
    15. July 2015 at 07:43

    I guess it is called the Dismal Science for a reason in which economist are celebrating lower wages! From my experience Tyler hits it correct that the skilled labor market is tight while the unskilled markets have room to move. So it is like 1993 labor market. However, this is quickly disappearing as:

    1) Companies are hitting the profit ceiling because foreign profits are diminishing (dollar value and recessions) and they can’t cut labor force. Our office does not have a talent bench and we are having trouble filling positions as ‘free agent talent’ is expensive.

    2) The big question I have is whether the young and working on education workers come back. We have seen every major recession the 16 – 24 workers drop as they put more efforts toward schools.

    3) I still think the developing world is falling into dangerous demographic loop. It is taking longer for young people to become settled in their careers which pushes back the ‘optimal’ age to get married and have children. First, the best way to make more young people become conservative is for them to be married and have daughters. That is not happening right now. Secondly, falling demographics will long term effect both AD and AS atlhough at different times.

  13. Gravatar of collin collin
    15. July 2015 at 09:20


    As boomers retire that lowers the AS curve. The boomers lowered their AD curve 15 years ago. Now the Generation Xers will have a lower AD in 5 – 10 years. (My purchase of goods is already decreasing and only the assistance of college payments will keep up my AD curve.)

  14. Gravatar of Anthony McNease Anthony McNease
    15. July 2015 at 11:14

    “Gee, that would be rotten, just rotten, if we had tight labor labor markets in the U.S., and for a long time.

    How would voters feel about free markets and capitalism when labor markets are tight, year after year?

    And the sniveling social welfare advocates, how would they justify their programs and their jobs, if anybody who could fog a mirror could gets job?

    And central bankers””with everybody working, how would they say that inflation was the Great Satan?”

    Niiiice. That’s one of the better rants I’ve seen here.

    Scott, you’ve asked several times lately “what is the Fed’s policy regime?” Is it possible that the de facto regime is “avoid wage inflation”? Yellen’s background is in fact labor economics. Is she and others too focused on labor market data and therefore not seeing the whole forest?

  15. Gravatar of Justin D Justin D
    15. July 2015 at 12:05

    Some of this was already covered in above comments but this is how I see it.

    Inflation has been relatively low the past several years: +1.3%/yr in the 4 years to May 2015.

    Productivity growth has also been slow. Nonfarm output per hour has risen +0.6%/yr in the 4 years to 2015Q1.

    Average hourly earnings for private workers have risen +2.1%/yr in the 4 years to May 2015.

    I don’t see this as a story about unexpectedly slow wage growth. There isn’t much inflation or productivity growth, therefore wages aren’t growing that fast. Wage growth is actually slightly higher than I would have expected, particularly in light of the fact that some productivity growth needs to fund growth in benefit and regulatory compliance costs.

    While unemployment is low, 5.3% unemployment in 2015 is not the same as 5.3% unemployment we saw in January 2005. The employment to population ratio for 25-54 year olds was 79.2% in January 2005 vs. 77.2% today. U6 unemployment was 9.3% in January 2005 but 10.5% today (eyeballing the chart, full time employment remains 1 million or so below the 2007 peak). The augmented unemployment rate which includes people who want a job but for whatever reason aren’t in the labor force was 8.3% in January 2005 but today it is 8.8%.

  16. Gravatar of Kevin Erdmann Kevin Erdmann
    15. July 2015 at 14:31


    I think if you account for the relative decline of the 35-44 age group population compared to 45-54 (which has slightly lower LFP) and the very long term trend (back to mid 20th century) of a decline of about 1% per decade in male LFP, across the prime age groups, you will find that the E-P ratio in 2015 is comparable to 2005, or at least is related to trends that are decades old.

  17. Gravatar of Neil Neil
    15. July 2015 at 16:52

    Average hourly earnings in the monthly jobs data has been soft; however, this increasingly looks like the outlier. The Employment Cost Index, the Atlanta Fed median hourly wage growth tracker and compensation per hour all show something closer to 3% than 2%. Isn’t the ECI a more robust measure? That being said, I full expect that at some point in the next year, payroll growth will slow and wages will rise, leaving aggregate incomes broadly steady.

  18. Gravatar of flow5 flow5
    16. July 2015 at 05:28

    It is axiomatic, with limited upward and downward price flexibility (nominal rigidity), unless money, and money flows (money times velocity, viz., AD), expand at least at the rate of “asked prices”, output can’t be sold, jobs will be lost, and incomes will decline.

    The U.S. will inevitably enter a recession in the 4th qtr. of 2015. There will be a “flash crash” in commodities in Dec.


  19. Gravatar of flow5 flow5
    16. July 2015 at 05:31

    parse, dt, real-output, inflation proxies…

    Mankiw Rule Tells The Fed To Tighten [View article]
    August CPI falls (-) .02 percent.

    1/1/2014 ,,,,,,, 0.158 ,,,,,,, 0.344 ,,,,,,, 0.417
    2/1/2014 ,,,,,,, 0.126 ,,,,,,, 0.381 ,,,,,,, 0.410
    3/1/2014 ,,,,,,, 0.139 ,,,,,,, 0.315 ,,,,,,, 0.407
    4/1/2014 ,,,,,,, 0.154 ,,,,,,, 0.333 ,,,,,,, 0.402
    5/1/2014 ,,,,,,, 0.146 ,,,,,,, 0.390 ,,,,,,, 0.397
    6/1/2014 ,,,,,,, 0.128 ,,,,,,, 0.344 ,,,,,,, 0.395
    7/1/2014 ,,,,,,, 0.168 ,,,,,,, 0.337 ,,,,,,, 0.387
    8/1/2014 ,,,,,,, 0.128 ,,,,,,, 0.300 ,,,,,,, 0.378
    9/1/2014 ,,,,,,, 0.125 ,,,,,,, 0.309 ,,,,,,, 0.368
    10/1/2014 ,,,,,,, 0.047 ,,,,,,, 0.267 ,,,,,,, 0.357 gDp falls
    11/1/2014 ,,,,,,, 0.051 ,,,,,,, 0.258 ,,,,,,, 0.347
    12/1/2014 ,,,,,,, 0.063 ,,,,,,, 0.195 ,,,,,,, 0.338
    Sep 17 2014 09:12 AM

    parse: dt, real-output, inflation

    01/1/2015 ,,,,, 0.13 ,,,,, 0.31
    02/1/2015 ,,,,, 0.09 ,,,,, 0.31
    03/1/2015 ,,,,, 0.10 ,,,,, 0.29
    04/1/2015 ,,,,, 0.08 ,,,,, 0.27
    05/1/2015 ,,,,, 0.05 ,,,,, 0.29
    06/1/2015 ,,,,, 0.06 ,,,,, 0.25
    07/1/2015 ,,,,, 0.06 ,,,,, 0.24
    08/1/2015 ,,,,, 0.02 ,,,,, 0.21
    09/1/2015 ,,,,, 0.02 ,,,,, 0.22
    10/1/2015 ,,,,, -0.05 ,,,,, 0.17 recession
    11/1/2015 ,,,,, -0.02 ,,,,, 0.16 recession
    12/1/2015 ,,,,, -0.03 ,,,,, 0.08 recession

    – Nostradamus

    Relative order of weakness in 2015 as contrasted to 2014:

    1/1/2015 ,,,,, -0.03 ,,,,, -0.04
    2/1/2015 ,,,,, -0.04 ,,,,, -0.07
    3/1/2015 ,,,,, -0.04 ,,,,, -0.03
    4/1/2015 ,,,,, -0.08 ,,,,, -0.07
    5/1/2015 ,,,,, -0.09 ,,,,, -0.10
    6/1/2015 ,,,,, -0.06 ,,,,, -0.10
    7/1/2015 ,,,,, -0.11 ,,,,, -0.09
    8/1/2015 ,,,,, -0.12 ,,,,, -0.10
    9/1/2015 ,,,,, -0.08 ,,,,, -0.06
    10/1/2015 ,,,,, -0.09 ,,,,, -0.09
    11/1/2015 ,,,,, -0.08 ,,,,, -0.11
    12/1/2015 ,,,,, -0.10 ,,,,, -0.13

  20. Gravatar of ssumner ssumner
    16. July 2015 at 08:15

    Collin, Generations don’t have AD curves (or if they did it would be income), I think you are confusing “consumption” with “AD”.

    Anthony, I hope they are focused on wage inflation, it makes far more sense than focusing on price inflation.

    I’d love to see the Fed do a 3% hourly wage target, level targeting. That might be even better than NGDPLT.

    Justin, It makes more sense to compare wages with NGDP growth, not inflation.

    Neil, I agree with your prediction. I’m afraid I don’t know much about the reliability of the ECI. I’d focus more on average hourly wages than median wages.

  21. Gravatar of flow5 flow5
    16. July 2015 at 08:57

    When money flows (proxy for inflation), falls from 22 to 8 within a couple of months, then commodities will be hard hit (it took 2 years for the same equivalent prior deceleration, from Jan 2013 to Dec 2014, and that collapsed the oil market and sent the dollar soaring). That type of price-level change coming on the back of the recent 4th qtr. 2014 decline, portends a depression-like deceleration.

    Scott Sumner: “I don’t disagree with claims that we should not have been expected to predict the financial crisis (if these crises were predictable, then they would not occur.”

    You are about to “eat crow”.

  22. Gravatar of flow5 flow5
    16. July 2015 at 09:25

    All CB time/savings deposits are derived deposits. As TDs grow, DDs shrink pari passu. All time/savings deposits are the indirect consequence of prior bank credit creation (loans=deposits, viz., “bank credit proxy”).

    The source of TDs is DDs, directly, or indirectly, via the currency route, or thru the CB’s undivided profits accounts – as anyone who has applied double-entry bookkeeping on a national scale should already know. And why should the CBs pay interest for something they already own?

    There are now + 10 trillion dollars of savings impounded within the confines of the CB System. DDs were 77 percent of TDs in 1959, and were 10 percent of DDs in 2008 (and that doesn’t include “saved” DDs).

    From the standpoint of the entire System of banks, the CBs do not loan out existing deposits, saved or otherwise, they always create new money, DDs, somewhere in the System, when they lend/invest.

    From the standpoint of the System, the savings practices of the non-bank public are reflected in the velocity of their deposits, not in their volume. Whether the public saves or dis-saves, chooses to hold their savings in the CBs, or to transfer them to the NBs, will not, per se, alter the total assets or liabilities of the CB System, nor alter the forms of these assets and liabilities.

    Monetary (voluntary), savings (funds held beyond the income period in which received), are impounded within the CB System. They are lost to investment, consumption, indeed to any type of payment or expenditure until their owners/savers decide to use them. Their means-of-payment velocity is zero (why do you think Vt has drastically fallen?).

    Un-used or un-spent CB held (bottled up), savings are a non-recognized leakage in Keynesian National Income Accounting procedures. The growth of TDs shrinks AD, and thus R-gDp. This exerts a dampening, contractionary, or net deflationary impact on prices, production, jobs, wages, and salaries.

    As the ratio of NB to CB lending shrinks, so will the economy as the utilization of savings, the circuit income and transactions velocity of available funds, shrinks.

    This decreases the supply of loan funds, increases the capitalization rate on earnings, and increases the level of long-term interest rates relative to what they would otherwise be. It decreases NIM for both the NBs and CBs. I.e., the welfare of the CBs is dependent upon the welfare of the NBs.

    The payment of interest on ‘excess’ reserve balances acts the same way as deregulating interest rates for the commercial bankers did. Raising Reg. Q ceilings for 5 consecutive times was the caused Stagflation (as predicted in the late 50’s).

    The IOeR policy rate inverts the short-end segment of the NBs wholesale funding yield curve. It induces dis-intermediation (an outflow of funds or negative cash flow) for the NBs singularly. Whereas dis-intermediation for the CBs isn’t predicated on the level of interest rates. The CBs could continue to lend even if the non-bank public ceased to save altogether…

    Lending by the CBs is inflationary, whereas lending by the NBs is non-inflationary, other things equal. And it takes increasing infusions of Reserve Bank Credit to generate the same inflation adjusted, dollar amounts of gDp. Since the Great-Recession, we had (1) “reflation” @ + 0.103 – PCE, but (2) real-output has lagged @ +0.088, – R-gDp, i.e., we got stagflation (business stagnation accompanied by inflation). This trend should accelerate.

    Raising the remuneration rate will cause an economic depression.

    See: “Profit or Loss from Time Deposit Banking” — Banking and Monetary Studies, Comptroller of the Currency, United States Treasury Department, Irwin, 1963, pp. 369-386.

  23. Gravatar of Postkey Postkey
    16. July 2015 at 09:38

    “The widely believed proposition that this financial crisis was “a tsunami that no-one saw coming”, and that could not have been predicted, has been given the lie to by an excellent survey of economic models by Dirk Bezemer, a Professor of Economics at the University of Groningen in the Netherlands.”

  24. Gravatar of flow5 flow5
    16. July 2015 at 10:22

    I am the Alpha and the Omega. I am the only one that not only predicted the recession, but predicted when the economy would collapse:

    POSTED: Dec 13 2007 06:55 PM |
    The Commerce Department said retail sales in Oct 2007 increased by 1.2% over Oct 2006, & up a huge 6.3% from Nov 2006.
    10/1/2007,,,,,,,-0.47,,,,,,, -0.22 * temporary bottom
    11/1/2007,,,,,,, 0.14,,,,,,, -0.18
    12/1/2007,,,,,,, 0.44,,,,,,,-0.23
    1/1/2008,,,,,,, 0.59,,,,,,, 0.06
    2/1/2008,,,,,,, 0.45,,,,,,, 0.10
    3/1/2008,,,,,,, 0.06,,,,,,, 0.04
    4/1/2008,,,,,,, 0.04,,,,,,, 0.02
    5/1/2008,,,,,,, 0.09,,,,,,, 0.04
    6/1/2008,,,,,,, 0.20,,,,,,, 0.05
    7/1/2008,,,,,,, 0.32,,,,,,, 0.10
    8/1/2008,,,,,,, 0.15,,,,,,, 0.05
    9/1/2008,,,,,,, 0.00,,,,,,, 0.13
    10/1/2008,,,,,,, -0.20,,,,,,, 0.10 * possible recession
    11/1/2008,,,,,,, -0.10,,,,,,, 0.00 * possible recession
    12/1/2008,,,,,,, 0.10,,,,,,, -0.06 * possible recession
    Trajectory as predicted:

  25. Gravatar of flow5 flow5
    16. July 2015 at 10:25

    Every boom/bust since the Great-Depression was both predictable and preventable.

  26. Gravatar of flow5 flow5
    16. July 2015 at 10:26

    Greenspan never tightened and Bernanke never eased.

  27. Gravatar of Ray Lopez Ray Lopez
    16. July 2015 at 11:25

    Sumner speaks from both sides of his mouth. exhibits A,B:

    (Exhibit A)
    Ray, You said:

    “(1) Boomers retire, and consume less, hence AD shifts to the left,”

    Ah, that’s the old Ray again, confusing AD and AS shifts.

    (Exhibit B)
    Collin, Generations don’t have AD curves (or if they did it would be income), I think you are confusing “consumption” with “AD”.

    Nice work. Esoteric writing wins again. Which is it Sumner? Either Boomers don’t have AD/AS curves, or they do. You can get away with this parsing style with laypeople, and Sumner is smart enough not to do this with his colleagues, but I notice even they sometimes don’t know what Sumner is talking about. The man is seriously confused and confusing. Why does anybody take him seriously?

  28. Gravatar of collin collin
    16. July 2015 at 12:41

    It is correct that Generations don’t have AD curves but Generational movements can have large effects on the AD and AS curve. Take Japan:

    Birth rates (I am eyeing wicki here)
    1946 – 55: 2.2M (Boomers)
    1975 – 85: 1.6M
    2005 – 15: 1.1M

    In general, most people start lowering their consumption at age 50. (Kids move out…Save for retirement). Low and behold Japanese boomers reached 50 in 1995 right in the middle of the lost decade so Monetary & Fiscal Policy had limitations. They could not increase AD and then 10 years later AS is impossible to increase at this point. And continued older people the consumption continues to decline. I do wonder how the developed world reacts to the baby bust as the competitive global has too many incentives for people to put off parenting (and marriage).

    I still wonder how much the demographics accented the economies with Ukraine and Greece economies. (Demographics was not the main problem but added to the debt levels.) And will Japan hit some kind of demographic bust?

  29. Gravatar of Don Geddis Don Geddis
    16. July 2015 at 14:56

    @Ray Lopez: “Why does anybody take him seriously?” Because he’s writing both for economics professionals, and also for educated laypeople. It’s not a surprise that those few in the audience with a kindergarten reading comprehension level have a hard time keeping up. Maybe this isn’t the place for you? Perhaps you might try a graphic novel version of the content?

  30. Gravatar of Don Geddis Don Geddis
    16. July 2015 at 14:58

    @collin: “Monetary & Fiscal Policy had limitations. They could not increase AD” Monetary policy never had (more than self-imposed) limitations, and Japan always had the power to increase AD (although they choose not to). Hence, your entire point collapses.

  31. Gravatar of flow5 flow5
    16. July 2015 at 15:55

    “It’s not a surprise that those few in the audience with a kindergarten reading comprehension level have a hard time keeping up”

    My capillaries have been closed for 25 years. I don’t have any brain cells left. So what’s Sumner’s excuse? I discovered the Gospel 37 years ago (its straight forward logic). The U.S. is headed into a recession in the 4th qtr. That’s inviolate and sacrosanct. As far as I can tell there’s not a professional economist on the planet that understands money and central banking.

  32. Gravatar of CA CA
    16. July 2015 at 16:46

    Geddis rules.

    Ray, feel free to go away and quit commenting here if you do not take Sumner seriously.

    Why do you stick around??

  33. Gravatar of Major.Freedom Major.Freedom
    16. July 2015 at 18:53

    Geddis sucks, but provides fodder for lulz.

    If you don’t take Ray seriously, why do you come here? If you don’t like what he says, feel free to leave.

    Hey neat, let’s all not practice what we preach. Then we’ll get accepted in the asylum here.

  34. Gravatar of CA CA
    16. July 2015 at 19:08

    Is this blog authored by Ray????

  35. Gravatar of Major.Freedom Major.Freedom
    16. July 2015 at 19:38

    Are blog authors who open their comments to the world’s population to be immune from everything but support from their true believers?

    Good luck with that.

  36. Gravatar of CA CA
    16. July 2015 at 19:54

    It’s beyond me why a commenter, who has labeled a specific blogger unworthy of serious consideration, would waste one second reading or commenting at said blog. It’s just plain nutty.

  37. Gravatar of Postkey Postkey
    17. July 2015 at 00:50


    “How to get growth in Japan
    Creating a full-blown recovery has been straight-forward all along, argues Richard A. Werner”

  38. Gravatar of Matt Waters Matt Waters
    17. July 2015 at 07:27

    Scott’s post is a straight-forward, orthodox view of sticky wages. I hate the term “reservation wages,” because really the employees have nothing to do with it.

    You’ve done well in life and manage a company with $1 million in revenue. Good for you. The Fed suddenly tightens policy and your revenue goes down to $900k. What incentive do you have to cut wages of current employees and therefore prices by 10% instead of layoffs?

    For a super-ideal competitive market, you would capture more of the market and increase revenue by cutting prices. But then you would have to hire as you’re decreasing wages for current employees. In what world would that make sense? Only employers with extremely commoditized and measured labor output like Uber could do that.

    So you, as a manager, cut 10% of the workforce. Your competitors do this as well. The laid off workers are now willing to work for less than the prevailing wage, but why does that matter? Your revenues and the number of your employees have gone down by 10%.

    The 90% remaining employees still earn the same wage. You could replace some of those remaining employees with laid off employees willing to work for less. However, those remaining employees are still generating revenue. You have to cut MORE than the decrease in revenue in order to hire the laid-off employees at the lower wage. Meanwhile, you incur large transaction costs of interviewing the laid-off employees and could piss off customers because you temporarily don’t have employees to match your amount of business.

    It really is pretty obvious how there are sticky wages and unemployment. This whole argument hinges on employees having far lower morale and productivity with nominal wage cuts, especially if the company’s revenue is actually growing and the owners’ profits go up. After all, the only reason for employers to cut wages is to increase their profits. That’s the only reason for employers to do anything.

    In the 70’s, morale could have similarly decreased if companies didn’t provide COLA’s. Therefore there was real, not nominal, wage stickiness. Wages matched inflation even if market wages would not have matched inflation, and “stagflation” resulted. Unionization was also much higher in the 70’s.

    Finally, one disturbing possibility is hinted at by Collin:

    “Our office does not have a talent bench and we are having trouble filling positions as ‘free agent talent’ is expensive.

    2) The big question I have is whether the young and working on education workers come back. We have seen every major recession the 16 – 24 workers drop as they put more efforts toward schools.”

    “Trouble filling positions” is basically an impossibility. Having trouble filling positions is like having trouble finding gas for your car. If you only want to fill your car with <$2.00 gas, you aren't going to be able to find gas.

    That said, managers have tended to hold out for perfection. In the collusion case with Apple/Google, Google especially wanted Apple employees who were already working and were not seeking employment. In Google's view, even somebody currently employed at Apple but seeking to move was not perfect enough. Google wanted an employee happy at their current position.

    Holding out for that sort of perfection seems…expensive. Google is willing to pay for that perfection, but other employers are not. Indeed, I have seen jobs posted for over a year.

    The disturbing possibility is whether managers have become risk-averse to the point where the labor market becomes shut out to anybody not currently in the market, including new graduates. NGDP increases will go entirely to higher wages of the current workforce rather than hiring those currently outside the labor market.

  39. Gravatar of ssumner ssumner
    17. July 2015 at 07:50

    Postkey, In any large group some people will get lucky with guesses, that is true.

    Ray, When boomers retire AS shifts left. How hard is that?

    Collin, You said:

    “In general, most people start lowering their consumption at age 50.”

    You are confusing consumption with AD

    Matt, Good comment.

  40. Gravatar of collin collin
    17. July 2015 at 09:03

    “Trouble filling positions” is basically an impossibility. Having trouble filling positions is like having trouble finding gas for your car. If you only want to fill your car with <$2.00 gas, you aren't going to be able to find gas.

    From our office, for important skilled positions we don't drive around for $2.00 gallon but we don't have the flexibility to have somebody internally at $2.50 gallon instead of driving around town and paying a premium $2.65 a gallon. And the $2.50 gallon person also tends to be more loyal to the organization. (Just of modern baseball teams…Most great teams are a combination of young farm system players and some free agents to create a team.) With the huge cutbacks in 2009 and outsourcing a lot of backroom India work, our office no longer has the potential $2.50 gallon gas anymore. (And yes I simplifying a lot here.)

  41. Gravatar of collin collin
    17. July 2015 at 09:08

    Isn’t consumption a big portion of AD? And if a nation had flat or falling AD wouldn’t the need for investment drop? At this point does Japan really need more infrastructure building? Yes I simplified consumption/AD, but if your economy is looking an older and falling population, isn’t it harder to increase AD or soon AS curves. Especially with falling populations, don’t debt level per person get larger?

  42. Gravatar of Kevin Erdmann Kevin Erdmann
    17. July 2015 at 14:28

    Collin said:
    “Trouble filling positions” is basically an impossibility. Having trouble filling positions is like having trouble finding gas for your car. If you only want to fill your car with <$2.00 gas, you aren't going to be able to find gas.

    This is only true if the only thing distinguishing your workers from one another is their hourly rate, which they would prominently display and change, up or down, in penny increments, to account for changing supply and demand.

  43. Gravatar of ssumner ssumner
    18. July 2015 at 06:44

    Collin, No, I could make Japanese NGDP rise at 20% a year, even with a falling population. It’s easy, just adopt an expansionary monetary policy.

    BTW, you also talk about AD like its a real concept, but it’s a nominal concept.

  44. Gravatar of collin collin
    18. July 2015 at 08:13

    I am simplified to gas prices. But I work in positions that there is the goal of 50K salary but a range of 45K to 65K for the job posting. In 2010, our office could easily find an outside candidate acceptable at 50K and bring them on. Now, they have to go up to 60K and they want all kinds of chances of advancement. However back in 15 years ago, we had more entry level positions that were working for $35K and learning the business. (Age 27) With this skilled position our office could offer $48K and have a successful position filled. After the cutbacks in 2009, we don’t have that bench to fill these positions internally. (So we have on-shored a few positions from India the last 12 months for this purpose.)

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