Though she has great powers, one should never conflate the chair of the Federal Reserve with a goddess. However, the image of one of those deities with many arms (arm inflation?) is what came to mind Friday while I was reading Fed Chair Janet Yellen’s big speech on monetary policy.
The speech, presented to economists and bankers gathered at an annual conference in Jackson Hole, Wyo., was about 16 pages of “on the one hand, this…on the other hand, that” vis-à-vis the evaluation of how tight the labor market is or isn’t.
That’s not a critique, by the way. To the contrary, it’s precisely the cautious analysis you want from your Fed chair at a time when:
— the job market is clearly improving, but slowly and with room to go before we’re at full employment;
— the signal-to-noise ratio from the usual indicators is weaker than usual, particularly regarding what’s cyclical and what’s structural (I agree with Bivens and Shierholz regarding the dominance of cyclical, and Yellen also tends to come down on that side);
— less careful voices than Yellen’s are pressuring the Fed to move preemptively against alleged future price pressures.
All she can tell you right now is that the time for tightening is getting closer, which you already knew.
There was, however, one section I found interesting — and it seemed uncharacteristically off to me. Yellen agrees that there’s not much in the way of wage pressure and correctly attributes that to remaining labor market slack. In weak job markets, employers don’t need to bid up wage offers to get and keep the workers they need. But the Fed chief offers a few reasons why that might not be a correct reading of the wage data.
First, she notes the possibility of “pent-up wage deflation.” It’s generally agreed that firms don’t like to reduce nominal compensation of incumbent workers, so-called downward nominal wage rigidities. Thus, since they didn’t lower wages much in the downturn, firms may “find that now they do not need to raise wages to attract qualified workers…[therefore] the current very moderate wage growth could be a misleading signal of the degree of remaining slack. Further, wages could begin to rise at a noticeably more rapid pace once pent-up wage deflation has been absorbed.”
But, as has been amply documented, we’ve been going through decades of downward pressure on most workers’ wages as a function of long-run, ongoing structural factors (more on those in a second). One of the few forces that has reliably counteracted those factors has been tight labor markets. So I suggest a shave with Occam’s razor here: Employers may not cut nominal pay in weak periods, but they sure don’t raise it unless they have to because labor demand is outpacing supply.
What are the long-term factors suppressing wage growth? In fact, Yellen cites a recent paper on the decline in labor’s share of national income, attributing that decline — though she omits this point — to “the offshoring of the labor-intensive component of the U.S. supply chain,” i.e., the loss of jobs due to imbalanced trade.
This is an important implicit statement by one of the world’s most important economists that globalization — more precisely, the persistence of large U.S. trade deficits — is taking a toll on paychecks. In fact, Yellen links this fall in labor share to a key inequality indicator, noting that that “…productivity growth could continue to outpace real wage gains even when the economy is again operating at its potential.”
In other words, there’s little wage pressure due to labor market slack, and part of that slack is generated by the loss of jobs that occurs when we run year-after-year of large trade deficits.
To her credit, Yellen is using her many hands to impressively juggle this and a broad spate of other indicators. And as long as her hands are busy, presumably she’ll keep her foot off the brakes.