Don’t base monetary policy on unreliable data

A James Alexander post

Scott Sumner, like many, was very taken with the latest average hourly earnings figures. The tick-up seemed to be breaking a very dull trend and taking the growth rate back up to the heady heights of 2007.

Unfortunately, the series he used – average hourly earnings for all private sector employees, seasonally-adjusted – only goes back to 2007. The much more traditional series for private sector non-supervisory and production employees goes back to 1965. This chart is perhaps a better guide to the long-run trends. It is far harder to spot any significant trend breakout.

JA Wage Growth_1

Also, the bigger data set includes many more service sector employees where hourly earnings aren’t a particularly relevant measure of pay. There are 120 million total private sector employees, but only 20 million of them who are outside (above?) the non-supervisory and production category.

It should be a simple matter to check the average hourly earnings of the 20 million supervisory and non-production workers but it isn’t. There doesn’t seem to be a dataset released for that, indicating to me at least that it isn’t a robust data set. It’s not on FRED and it’s not even on the Bureau of Labour Statistics website. There are some (very old) discussions about how the hours for this segment are calculated, but not a lot of recent statistical material, if any. I think this makes it highly dangerous to rely on the all private workers average hourly earnings growth figures.

The seasonal adjustments may also be harder to do and often lead to large revisions. The non-seasonally adjusted version of Scott’s chart looks a lot less compelling.

JA Wage Growth_2

In the absence of any guidance from the BLS that I can find I did a some simple calculations to find out the average weekly pay of the “white collar” employees. It is more than twice that of the “blue collar” staff.  And the gap must be growing given the recent trends in the two indices in the first chart. If I was to derive a longer term chart for the growth in “white collar” average earnings per hour then I bet I would find a very volatile series indeed. The question is then: should this highly volatile, not particularly robust, sub-series drive monetary policy? Of course, not.

JA Wage Growth_3

All this discussion is a bit beside the point given the horribly low and lower overall inflation figures and the negative growth  in US$ base money. The Fed is still wedded to the output gap/Philips theory of inflation and it has been proven wrong – no respectable mainstream economist who believes in basic macro would have predicted a halving of the US unemployment number without a major rise in wages. They (and the central banks) need to rethink their macro, it is time for them to ‘fess up and stop worrying about such ad hoc concepts as “secular stagnation”. Just as the inflationistas have had to rethink their understanding of macro – I should know, I used to be one. Money drives nominal growth and wages, and good nominal growth allows strong real growth.

 

The UK nominal wage growth has a long way to go yet

A James Alexander post

UK nominal wage growth figures today showed that the encouragingly upward trend of the last few months has somewhat stalled. 2.4% on a rolling 3m YoY basis is OK but nothing to get excited about, and it certainly hasn’t lasted anything like long enough. At the moment it is a flash in the pan. It may remain just flash in the pan if the Bank of England remains hovering over the pan with its fire blanket ready to snuff out anything approaching … what percentage growth rate exactly? What is the science behind the fire blanket? There is very little.

James_AWE

Governor Carney has indicated a few times that active money tightening is just a few months away. Why? What is the science behind his constant harping on about the need to actively tighten soon? There is nothing there apart from ingrained caution grounded in nothing.

Strong wage growth is a good thing. There, I’ve said it. He and the Bank have to demonstrate how a nominal wage growth at the heady heights of 4% in the noughties caused any serious inflation or even economic damage. It didn’t. However, fear of headline inflation above 3% did cause some serious economic damage going into the Global Financial Crisis.

Benjamin Cole has argued on this site for 6-7% NGDP targets. This may seem extreme but then there are good grounds for such a target, not just because of catching up with the growth path of the past, the “Level Targeting” part of Inflation or NGDP Level Targeting.

Strong grounds for a high rate of NGDP growth also come for the argument that only 5% nominal wage growth or more can provide the whole economy with the sort of micro-level flexibility needed to efficiently allocate labour supply. One of the principle obstacles to efficiently allocating labour is downwardly sticky nominal wages. In a recession it is downwardly sticky nominal wages that leads to mass unemployment as employers almost always have to cut staff to bring costs into line with lower revenues.

In some macro models this can cause liquidity traps and Keynesian downward spirals. We have all known that monetary policy can be loosened via interest rates to prevent this tragedy, and we now have proof that even if at the Zero Lower Bound monetary policy can still be loosened by QE and other unorthodox programmes. Top macroeconomists have known for many years that the theory of QE should work, but it hadn’t been used much at all until the last few years. Thankfully, there is no liquidity trap – just incompetent central bankers.

Downwardly sticky wages aren’t only important in a crisis but in a recovery and normal times too. A simple thought experiment illustrates the point.

If average whole economy wage growth is 5% then we can assume that there is a spread of wage growth between 0% (the sticky wages lower bound) and, say 10%. Some people, skills, experience, industries, regions will be getting nearer 10%, some nearer 0%. Labour will be moving around, more or less, to the more highly remunerated areas, sometimes merely by learning new skills, sometimes by physically moving. This is a good thing and means the economy can grow into new areas, often yielding the elusive productivity growth.

If average nominal wages are growing at just 2.5% then the lower bound is still going to be the 0% but the upper bound gets similarly restricted since the overall economy is straight-jacketed by the 2.5% wage growth. Not that many can get the 5-10% increases, because of the maths of the 2.5% whole economy rate of growth. The corollary is that the economy as a whole is less flexible, less able to allocate labour resources efficiently.

As we know, our current crop of central bankers and consensus economists think virtually any nominal wage growth a bad thing, hence the hovering fire blanket. The fear of the fire blanket will, with rational expectations, lead to fewer fires, less economic growth. Maybe that’s what the consensus of experts wants, but it can’t be what the mass of the population wants. The inflation target of 2% should be ditched now, in favour of a growth-inducing NGDP Level Target of at least 5%, but 6 or 7% for a few years to make up for lost ground, lost generations – generations turning to left and right wing populism doomed to failure.