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Sunday, October 05, 2014

Fed Watch: Is There a Wage Growth Puzzle?

Tim Duy:

Is There a Wage Growth Puzzle?, by Tim Duy: Is there a wage growth puzzle? Justin Wolfers says there is, and uses this picture:

WOLFERS

to claim:
This puzzle isn’t entirely new, as the usual link between unemployment and the rate of wage growth has totally broken down over recent years.
​ The recent data have made a sharp departure from the usual textbook analysis in which a tighter labor market leads to faster wage growth, and subsequent cost pressures feed through to higher inflation.
But has the link between wage growth and unemployment "totally broken down"? Eyeball econometrics alone suggests reason to be cautious with this claim as the only deviation from the typical unemployment/wage growth relationship is the "swirlogram" of fairly high wage growth relative to unemployment through the end of 2011 or so. But is this a breakdown or a typical pattern of a fairly severe recession? While, it might seem unusual if you begin the sample at 1985 as Wolfers did, so let's see what the 1980-85 episode looks like:

PHILa100314

Same swirlogram. Compare the two recessions:

PHILd100314

Fairly similar patterns, although in the 80-85 episode there was more room to push down the inflation expectations component of wage growth. It would appear that in the face of severe contractions, wage adjustment is slow. Now consider the 1985-1990 period:

PHILb100314

Notice that wage growth is stagnant until unemployment moves below 6% - past experience thus suggests that we should not expect significant wage growth until we move well below 6% (you could argue the response actually began at 6.5%). Thus, it is premature to believe that there has been a breakdown in this relationship. So far, the response of wages is exactly what you should have expected in light of the 1980's dynamics. Which leads to two points:
  1. I am no fan of Dallas Federal Reserve President Richard Fisher. That said, he did not pick 6.1% out of a hat when he said that was the point at which wage growth has tended to accelerate in the past. That number fell out of his staff's research for a reason and surprises me not one bit.
  2. There is a reason the Fed picked 6.5% unemployment for the Evan's rule. There was absolutely no chance that that would be a meaningful number as far as labor market healing is concerned.
Consider now the sample since 1990:

PHILc100314

Note four points:
  1. Notice the minor "swirlogram" associated with the early-90's recession. Again, not a breakdown.
  2. After 1992, wage growth tends to move sideways until unemployment sinks below 6%.
  3. Since 2012, the relationship is as traditional theory would suggest, a point that is actually evident on Wolfer's chart as well. The R-squared on the regression line is 0.75. Although notice that again, as wage growth moves into that 2.5% range, it appears to once again move mostly sideways. No mystery - nothing we haven't seen before.
  4. Clearly, there is some noise in the relationship. You should be able to extract away from the noise and recognize that there is no sudden acceleration in wage growth.
Now let's take another step and consider the relationship between unemployment and real wages (note that the series ends in 2014:8 - we don't have the September PCE price data yet):

PHILf100314

The period of the Great Disinflation was generally associated with negative real wage growth. The period of the mid-90s to the Great Recession was generally associated with positive real wage growth. The swirlogram of the Great Recession is again evident, but notice that as unemployment approached the bottom end of the black regression line (R-squared = 0.65), real wage growth actually accelerated before returning to trend. I now have additional sympathy for firms that have complained in the past two years that they could not push wage growth through to higher prices. It does appear that real wage growth was faster than might be expected given the pace of economic activity and, by extension, the level of unemployment.
Oh - and real wage growth has reverted to the pre-Great Recession trend - pretty much exactly where you would expect it to be given the level of unemployment. Honestly, this one surprised me.
Which suggests that labor market healing has progressed much further than many progressives would like to admit. Many conservatives as well.
Which also means a lot of people are not going to like this chart.
And before you complain that the all-employee average wage data holds some great secret that is not in the production and nonsupervisory wage series (I have trouble taking seriously any sweeping generalizations of the business cycle dynamics of a series we only have through one business cycle), here is that version:

PHILg100314

Same swirlogram. Pretty much the same idea with wage growth heading right back to where you would expect prior to the great recession.
Bottom Line: Be cautious in assuming that this time is different. The unemployment and wage growth dynamics to date are actually very similar to what we have seen in the past. Low wage growth to date is not the "smoking gun" of proof of the importance of underemployment measures. There very well may have been much more labor market healing that many are willing to accept, even many FOMC members. The implications for monetary policy are straightforward - it suggests the risk leans toward tighter than anticipated policy.

    Posted by on Sunday, October 5, 2014 at 12:18 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (36) 


    Links for 10-05-14

      Posted by on Sunday, October 5, 2014 at 08:01 AM in Economics, Links | Permalink  Comments (48) 


      Saturday, October 04, 2014

      Links for 10-04-14

        Posted by on Saturday, October 4, 2014 at 09:19 AM Permalink  Comments (112) 


        Friday, October 03, 2014

        'Comments on Employment Report: Party Like it's 1999!'

        Bill McBride on today's employment report:

        Comments on Employment Report: Party Like it's 1999!: Earlier: September Employment Report: 248,000 Jobs, 5.9% Unemployment Rate

        This was a solid report with 248,000 jobs added and combined upward revisions to July and August of 69,000. As always we shouldn't read too much into one month of data, but at the current pace (through September), the economy will add 2.72 million jobs this year (2.64 million private sector jobs). Right now 2014 is on pace to be the best year for both total and private sector job growth since 1999.

        A few other positives: the unemployment rate declined to 5.9% (the lowest level since July 2008), U-6 (an alternative measure for labor underutilization) was at the lowest level since 2008, the number of part time workers for economic reasons declined slightly (lowest since October 2008), and the number of long term unemployed declined to the lowest level since January 2009.

        Unfortunately wage growth is still subdued. From the BLS: "Average hourly earnings for all employees on private nonfarm payrolls, at $24.53, changed little in September (-1 cent). Over the year, average hourly earnings have risen by 2.0 percent. In September, average hourly earnings of private-sector production and nonsupervisory employees were unchanged at $20.67."

        With the unemployment rate at 5.9%, there is still little upward pressure on wages. Wages should pick up as the unemployment rate falls over the next couple of years, but with the currently low inflation and little wage pressure, the Fed will likely remain patient.

        A few more numbers...

        [Dean Baker's comments are here.]

          Posted by on Friday, October 3, 2014 at 08:10 AM in Economics, Unemployment | Permalink  Comments (89) 


          Paul Krugman: Depression Denial Syndrome

          What is the price for getting it wrong?:

          Depression Denial Syndrome, by Paul Krugman, Commentary, NY Times: Last week, Bill Gross, the so-called bond king, abruptly left Pimco, the investment firm he had managed for decades. People who follow the financial industry were shocked but not exactly surprised; tales of internal troubles at Pimco had been all over the papers. But why should you care?
          The answer is that Mr. Gross’s fall is a symptom of a malady that continues to afflict major decision-makers, public and private. Call it depression denial syndrome: the refusal to acknowledge that the rules are different in a persistently depressed economy. ...
          Now, we normally think of deficits as a bad thing — government borrowing competes with private borrowing, driving up interest rates, hurting investment... But, since 2008, we have ... been stuck in a liquidity trap... In this situation,... deficits needn’t cause interest rates to rise. ...
          All this may sound strange and counterintuitive, but it’s what basic macroeconomic analysis tells you. ... But many, perhaps most, influential people in the alleged real world refused to believe...
          Which brings me back to Mr. Gross.
          For a time, Pimco — where Paul McCulley, a managing director at the time, was one of the leading voices explaining the logic of the liquidity trap — seemed admirably calm about deficits, and did very well as a result. ...
          Then something changed. Mr. McCulley left Pimco at the end of 2010..., and Mr. Gross joined the deficit hysterics, declaring that low interest rates were “robbing” investors and selling off all his holdings of U.S. debt. In particular, he predicted a spike in interest rates when the Fed ended a program of debt purchases in June 2011. He was completely wrong, and neither he nor Pimco ever recovered.
          So is this an edifying tale in which bad ideas were proved wrong by experience, people’s eyes were opened, and truth prevailed? Sorry, no. In fact, it’s very hard to find any examples of people who have changed their minds. People who were predicting soaring inflation and interest rates five years ago are still predicting soaring inflation and interest rates today, vigorously rejecting any suggestion that they should reconsider their views in light of experience.
          And that’s what makes the Bill Gross story interesting. He’s pretty much the only major deficit hysteric to pay a price for getting it wrong (even though he remains, of course, immensely rich). Pimco has taken a hit, but everywhere else the reign of error continues undisturbed.

            Posted by on Friday, October 3, 2014 at 12:24 AM in Budget Deficit, Economics | Permalink  Comments (83) 


            Thinking the Unthinkable: The Effects of a Money-Financed Fiscal Stimulus

            Jordi Gali:

            Thinking the Unthinkable: The Effects of a Money-Financed Fiscal Stimulus, by Jordi Galí, Vox EU: Many unconventional policies adopted by central banks in response to the Crisis failed to boost the economy. This column discusses the effects of a temporary money-financed fiscal stimulus. When a more realistic model is allowed, such a stimulus can have a strong effect on output and employment, and a mild effect on inflation. 

            He ends with:

            The time may have come to leave old prejudices behind and come to terms with the urgent need to increase aggregate demand in a more foolproof way than tried up to now, especially in the Eurozone. The option of a money-financed fiscal stimulus should be considered seriously.

              Posted by on Friday, October 3, 2014 at 12:15 AM in Economics, Fiscal Policy | Permalink  Comments (68) 


              Links for 10-03-14

                Posted by on Friday, October 3, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (59) 


                Thursday, October 02, 2014

                Is Blogging or Tweeting about Research Papers Worth It?

                Via the Lindau blog:

                The verdict: is blogging or tweeting about research papers worth it?, by Melissa Terras: Eager to find out what impact blogging and social media could have on the dissemination of her work, Melissa Terras took all of her academic research, including papers that have been available online for years, to the web and found that her audience responded with a huge leap in interest...

                Just one quick note. This is what happened when one person started promoting her research through social media. If everyone does it, and there is much more competition for eyeballs, the results might differ.

                  Posted by on Thursday, October 2, 2014 at 09:02 AM in Academic Papers, Economics, Weblogs | Permalink  Comments (15) 


                  Why is our Infant Mortality so Bad?

                  Aaron Carroll:

                  So why is our infant mortality so bad?: ...Everyone knows that in international comparisons, the infant mortality rate in the US is terrible. Some people think it’s because we code things differently and try harder to save premature babies. Others think that’s not true, and that this points to other problems in the health care system.
                  As always, though, it’s probably a mixture of many things. A new NBER working paper gets at just that. “Why is Infant Mortality Higher in the US than in Europe?” ... What did they find?
                  Reporting differences ... explained up to 40% of the disadvantage in US infant mortality. But that would only get us closer. It would still leave us way worse. ... What accounted for the real disadvantage was postneonatal mortality, or mortality from one month to one year of age. That difference was almost entirely due to excess inequality in the US. ...
                  So there are two main takeaways from this paper. The first is that although reporting differences can account for some of our worse infant mortality statistics, most of the differences we see are not due to that explanation. The second is that most of the rest of the disadvantage is due to differences in postneonatal mortality, that likely require fixes to the healthcare system. Whether the ACA does so remains to be seen.

                    Posted by on Thursday, October 2, 2014 at 08:50 AM in Economics, Health Care, Income Distribution | Permalink  Comments (22) 


                    Links for 10-02-14

                      Posted by on Thursday, October 2, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (95) 


                      Wednesday, October 01, 2014

                      The Contribution of Fiscal Policy to Real GDP Growth

                      Fiscal_Impact9_30_14

                      [From Brookings]

                      The fiscal impact measure shows how much federal, state, and local government taxes and spending added to or subtracted from the overall pace of economic growth. Between 2008 and 2011, fiscal impact was positive, indicating that government policy was stimulative; in recent years, it has been negative, indicating restraint. (For more detail on how this measure was constructed and how to interpret it, see our methodology.)

                        Posted by on Wednesday, October 1, 2014 at 10:26 AM in Economics, Fiscal Policy | Permalink  Comments (63) 


                        'Americans Work Too Long (and Too Often at Strange Times)'

                        I'm not so sure that the solution to Americans working "strange hours" is "to revert to the shop-closing laws (Blue Laws) that prevailed in the US years ago." What do you think?:

                        Americans work too long (and too often at strange times), by Daniel S. Hamermesh, Elena Stancanelli, Vox EU: The facts on work hours and timing The average US workweek is 41 hours, 3 hours longer than Britain’s and even longer than in Germany, France, Spain, or the Netherlands (see the Table below).

                        • 32% of American employees work 45 or more hours, compared with 18% in Germany, and 4% in France.
                        • Only in the UK does the percentage of employees putting in these long hours approach the US one.

                        Over a year, the average American employee puts in 1,800 hours, which is more than any other wealthy country, even Japan. What is remarkable is the change during the past three decades. In 1979, Americans looked little different from workers in these other countries, working about the same number of hours per year as the French or the British, and many fewer hours than Japanese. Since then, employees in other countries have begun to take it easier, to enjoy their riches, but Americans have not.

                        The picture is even bleaker than these numbers suggest. Not only do Americans work longer hours than their European counterparts, but they are much more likely to work at night and on weekends.

                        • 27% of US employees perform some work between 10 p.m. and 6 a.m.
                        • In France, the Netherlands, Spain, and Germany the comparable fractions are much lower. Even in the UK, only 19 % of workers are on the job at night. 

                        Work on weekends is also more common in the US than in other rich countries, with 29% of American workers doing some work on weekends, far above Germany, France, Spain, and the Netherlands; and even in the UK only 25% of employees do some work on weekends. But despite their greater likelihood of working at these strange times, those Americans who work then put in no more hours per day than the smaller numbers of European workers who are on the job at nights and weekends.

                        Table 1.  Characteristics of work hours in the US and elsewhere: Amounts and timing

                        Voxeu1

                        Source:  Hamermesh and Stancanelli (2014)

                        Why these facts matter

                        Weekend and night work is not attractive to most workers. Unsurprisingly, therefore, it generates, on average, higher pay per hour than work at ‘normal’ times—wage differentials that compensate for the undesirability of working at unattractive hours (Kostiuk 1990). Also unsurprisingly, it attracts workers with the least human capital. In the US and Germany, young workers, those with less education, and immigrants are more likely than other employees to work at these times. In the US, minorities are also more likely to perform weekend and night work (Hamermesh 1996). The burden of working at unpleasant times falls disproportionately on those who have the least earning power.

                        Are the phenomena related?

                        If Americans’ workweeks were shortened to European levels, would their likelihood of working at these strange times drop to European levels? Do the American labour market, institutions, and culture make night and weekend work more prevalent independent of the length of the workweek?

                        To answer the titular question of this section, we examine the determinants of the probability of night work using data from various time-diary surveys for the US and France, Germany, the Netherlands, Spain, and the UK. For the US, we relate these probabilities to workers’ weekly work-hours and a large number of their demographic characteristics—age, immigrant and urban status, educational attainment, and others. 

                        • Compared to those working 40 hours, American employees putting in 65+ hours per week are 44% more likely also to work on weekends, and 37% more likely to work at night. The phenomena of long hours and strange hours are related.

                        If we simulate what would happen to the probabilities of weekend and night work if the US had the same distributions of weekly work-hours as each of the 5 European countries, not surprisingly, those probabilities would drop -- but not very much. Even with France’s short workweeks, 25% of American employees would still be working on weekends, as high as the highest percentage in any of these 5 countries; and 22% would still be working at night, well above even the highest percentage in Europe. Even if no American worked more than 45 hours per week, the percentage performing weekend work would fall only to 24, and the percentage doing night work would fall only to 25.

                        Even with a reduction in American workweeks that lowered American work-hours down to European hours, Americans would be doing more night and weekend work than Europeans. Looking at time-diary data from the mid-1970s, this result should not be surprising. For example, at that time 26% of American employees worked on weekends, whereas only 14% of Dutch employees did so, both about the same as today, even though the Dutch and American workweeks were then much closer in length than they are today. 

                        Why, and what to do (if anything)?

                        Why are Americans so much more likely to work at strange times than Europeans? The results here show that it is not because Americans work more than Europeans.

                        • One cause might be the greater inequality of earnings in the US that induces low-skilled workers -- earning relatively less than low-skilled Europeans -- to desire more work at times that pays a wage premium. 
                        • Another possibility is cultural, so that Americans just enjoy working at these times more than their European counterparts. But citing cultural differences is an easy way to avoid thinking or doing anything about an issue. 

                        Many European countries impose penalties on work at nights and on weekends, with some of the penalties being quite severe (Cardoso et al. 2012). The evidence in Cardoso et al. (2012) suggests that imposing penalties on night and/or weekend work will reduce its incidence. Work at different times of the week is substitutable, and employers are responsive to changing incentives to alter the timing of work. But that evidence also shows that even substantial incentives do not produce huge changes in work timing. If we really want to reduce the amount of work that occurs at times that are viewed as unpleasant, the solution may be to revert to the shop-closing laws (Blue Laws) that prevailed in the US years ago. No free-marketer would like this, but it may well be worth reviving these laws in order to get the US out of what might be a low-level, rat-race equilibrium.

                        References:

                        Cardoso, A R, D Hamermesh and J Varejão (2012), “The Timing of Labor Demand,” Annals of Economics and Statistics, 105/106, 15-34.

                        Hamermesh, D (1996), Workdays, Workhours and Work Schedules: Evidence for the United States and Germany, Kalamazoo, MI: The W.E. Upjohn Institute.

                        Hamermesh, D and E Stancanelli (2014), “Long Workweeks and Strange Hours,” National Bureau of Economic Research, Working Paper No. 20449.

                        Kostiuk, P (1990), “Compensating Differentials for Shift Work,” Journal of Political Economy, 98(3), 1054-75.

                          Posted by on Wednesday, October 1, 2014 at 10:24 AM in Economics | Permalink  Comments (38) 


                          The Unemployment Rate is an 'Inadequate Measure of Slack'

                          Jared Bernstein says there's more slack in the labor market than you'd think from just looking at the unemployment rate:

                          ...So why not just look at the unemployment rate and call it a day? Because special factors in play right now make the jobless rate an inadequate measure of slack. In fact, at 6.1 percent last month, it’s within spitting distance of the rate many economists consider to be consistent with full employment, about 5.5 percent (I think that’s too high, but that’s a different argument).
                          There are at least two special factors that are distorting the unemployment rate’s signal. First, there are over seven million involuntary part-time workers, almost 5 percent of the labor force, who want, but can’t find, full-time jobs. That’s still up two percentage points from its pre-recession trough. Importantly, the unemployment rate doesn’t capture this dimension of slack at all...
                          The second special factor masking the extent of slack as measured by unemployment has to do with participation in the labor force. Once you give up looking for work, you’re no longer counted in the unemployment rate, so if a bunch of people exit the labor force because of the very slack we’re trying to measure, it artificially lowers unemployment, making a weak labor market look better.
                          That’s certainly happened over the recession and throughout the recovery...

                          There's still plenty of room, and plenty of time for fiscal policymakers to do more to help the unemployed (and with infrastructure, our future economic growth at the same time). Unfortunately, Congress has been captured by other interests. As for monetary policy, let's hope that the FOMC listens to Charles Evans' call for patience. Raising rates too late and risking a temporary outbreak of inflation is far less of a mistake than raising them too early and slowing the recovery of employment. And there's this too: Unemployment Hurts Happiness More Than Modest Inflation.

                            Posted by on Wednesday, October 1, 2014 at 09:01 AM in Economics, Fiscal Policy, Monetary Policy, Politics, Unemployment | Permalink  Comments (24) 


                            Links for 10-01-14

                              Posted by on Wednesday, October 1, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (143)