TODAY’S labour market report showed that the American economy created 156,000 net new jobs in August. That was a bit less than expected, but payrolls are still growing comfortably faster than the working-age population. Despite having created over 2m jobs in the last year, pushing unemployment below 4.5% for the last five months, wage growth remains muted, at around 2.5%, compared to more like 3.5% the last time unemployment was comparably low. In a recent article for the print edition, I anlysed one potential explanation for weak wage growth: retirements of high-earnings baby-boomers.
Scott Sumner has taken issue with the premise of my piece. He says there is no puzzle at all. Instead, slow wage growth is being caused by slow growth in nominal GDP (cash-terms spending in the economy) — “end of story”. He says I forgot about monetary superneutrality, the idea that in the long run, neither monetary policy nor changes in monetary policy affect real economic variables like unemployment. He quotes Miles Kimball:
“Sometimes journalists discuss a zero output gap combined with too-low inflation as if such a situation were strange, but a range of different macroeconomic theories all have the property that a zero output gap is consistent with any constant inflation rate.”
Mr Kimball is right, of course. In the long run, an economy and its labour market can sustain any inflation rate in equilibrium. But, contrary to Mr Sumner’s argument, this does not tell us much about America’s economy today. The labour market is plainly not in equilibrium. It continues to add jobs faster than the population is growing. The question for policymakers is: how long can that continue?
Another way of putting the question is to ask what would happen if the Fed let nominal GDP grow a little faster. If no output gap remains, more nominal GDP growth would translate into more inflation, and hence into higher nominal wage growth (unemployment might also temporarily fell below its natural rate, a concept whose history I recently wrote about). Alternatively, it is possible that faster nominal GDP growth would lead to more job creation without sparking much inflation or wage growth, just as was possible when unemployment was higher.…read more
Read more here: Is there a wage growth puzzle in America?
Category: Business and finance, Free exchange