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Sunday, May 29, 2011

Will Labor Costs Return to Trend?

Tim Duy:

Will Labor Costs Return to Trend?, by Tim Duy: Paul Krugman notices a Bloomberg story on accelerating wage growth:

First, Bloomberg reports on signs that wages may be accelerating. It’s worth bearing in mind that we’re talking about modest stuff — if the employment cost index accelerates to 2 percent, that’s still just productivity growth, and hardly a sign of runaway inflation. Still, this isn’t what I expected to see, and I will be watching developments.

Yes, 2 percent is hardly anything to be concerned about. As Krugman notes, this is just productivity growth. It is the next issue I struggle with – should we care if, at least in the short run, wages accelerate at a rate faster than productivity growth?

Note the path of unit labor costs since 1983:


Further note how far below trend we are:


Constrained unit labor costs probably have no small role in these kinds of stories:

“The bright side is that there’s a clear dichotomy between the health of corporate America and the economy,” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which manages $53 billion. “We’ve softened somewhat. Still, profits remain good and there’s M&A activity. That tells me that we’re not going to see a huge move in stocks in either direction.”

To return to trend, unit labor costs would need to accelerate at a rate greater than trends. That this might come at the expense of corporate profits does not upset me. It will, however, upset the Fed, who will tighten policy in response, as they will assume – not without reason – that profits will not suffer. Firms will simply pass on the wage gains in the form of higher prices. Which leaves me wondering again how income will be transferred back to employees? Under what circumstances might we expect unit labor costs to revert to trend? Especially if the Fed remains in a trigger-happy state of mind?

    Posted by on Sunday, May 29, 2011 at 12:06 AM in Economics, Income Distribution, Unemployment | Permalink  Comments (28)


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