A James Alexander post
Tim Duy provides an excellent summary of the state of play in the US economy from last week’s data releases. While Duy lands on the side of caution in terms of rate rises he is still unsure about what the Fed is actually targeting. I don’t think Duy is cautious enough because the Fed should drop all ideas of rate rises in the future, and not just talk about delaying them. A neutral stance rather than their current stop-start tightening bias is most appropriate.
One of his charts shows wage growth over the last 20 years. I think it shows just how far the US has yet to go in terms of achieving a healthy economy that needs any monetary tightening. Back in the 1990s hourly wage growth was running at around a nominal 4%. The Atlanta Fed wage growth showing wage growth for those in work for at least 12m was running at 5% – the difference being that those in temporary or part-time employment often see less wage growth.
Looking at just the Atlanta Fed data itself, there is a fascinating breakdown between different categories of employed workers. Particularly job stayers vs job switchers. A healthy labor market, from the point of view of labor, is one where there is a good degree of job switching. It is also healthy from the point of view of the economy in that it allows good nominal growth to do its magic.
A healthy labor market, a healthy economy
- One where workers who perform less well (are less productive) than average or in firms of industries doing less well than average, see their nominal pay rise but by less than those doing better (more productive) than average or in firms or industries doing better than average.
- In real terms those doing less well than average or in firms or industries doing less well than average will see smaller rises or even possibly small falls.
- This is an excellent result as it allows relative winners and losers to emerge yet without compulsory job losses.
- Productivity rises as those workers more productive than average or in firms and industries more productive than average do better. The result is real economic growth for all.
In the 1997-2001 period job switchers (those who were recognised as being more productive) did significantly better than average – and there was a productivity boom. Between 2002-2006 the weak recovery did not see this pattern repeated, although it was emerging by 2006 just as the Fed began to apply the monetary brakes. The story post 2008 is dreadful. Monetary tightness has prevented not only any significant nominal wage growth but also any healthy differentiation – and any productivity growth to boot. It is only in the last few quarters that there has been any signs of healthy wage growth and again the beginnings of some healthy differentiation – differentiation in wage growth between job-stayers and job-switchers that leads to productivity growth.
A potential tragedy versus a potentially healthy labor market
Yet what do we see? A Fed already intent on repeating its historic 2007-2008 mistake of tightening monetary policy when on the cusp of a healthy labor market. What a tragedy! No wonder economic populism came close to winning the Democratic nomination, has won the Republican nomination and may yet win the Presidential election. Elites reap what they have sown (see Brexit). Neglect nominal GDP growth at your peril.