September 5, 2014

Is Monetary Policy Stagnating Hourly Wages?

The "Inequality Sucks" crowd harps on the low wages paid to unskilled workers almost as much as they envy the wealth of the 1%ers (the only group to see it's overall wealth rise under President Obama). I've been defending the property rights of the evil rich bastards by claiming that less government overhead holding back private industry will, all things being equal, create new jobs (i.e. labor demand) and move labor wages up the demand-supply curve. It's basic economics - everything except the "all things being equal" part.

The trader's tool site Econoday is explaining the relationship between unemployment rate and annual earnings growth thusly:

When the economy is operating at full throttle, a falling unemployment rate worries policymakers as they anticipate that rapidly rising wages will turn into runaway inflation. In fact, wage growth did accelerate in 2005 and over most of 2006 as the jobless rate headed lower. But the reverse has been true during the past recession and early recovery. A rising jobless rate often alleviates wage pressures but is typically associated with economic recession. Federal Reserve policymakers aim for balanced growth with very low inflation.

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(Note that under Bush, wage growth was generally above 2.5% yearly, while under Obama it has generally been less than 2.5%.)

I had believed that economic growth was accidentally retarded by confiscatory taxation and abusive industrial regulation but it appears there is more to it than that - economic growth is "balanced" because the fiat bankers at the FED want it that way, as a check on inflation. Somebody smart is gonna have to explain to me why this is good. I'm not about to defend it.

Economics and Markets From the other side Monetary Policy Posted by JohnGalt at September 5, 2014 2:46 AM

The relation of unemployment to inflation is called The Phillips Curve and it has a rejuvenation capacity that Freddy Krueger would envy. It should have been discredited by the Volker Fed's slaying the stagflation beast with a strong dollar.

But but but but -- is my blog brother campaigning for looser money or accusing the Fed of driving up unemployment by tightening too quickly? Is gravity still 9.8 m/sec2?

Posted by: jk at September 5, 2014 9:53 AM

I'm not advocating anything yet, since I don't really understand what's going on. But in principle, if the FED has to rig the money supply such that the economy can't grow as much as it would otherwise do, that is objectionable. If their fiat currency "inflates" because too many goods are being produced too fast then find some other way to regulate the stupid currency. You're smart guys, right? You think your smart enough to manage the whole freakin' economy.

What I'm after is so much job growth that workers can pick and choose from more good options, with higher wages. Sort of a "We're all North Dakota now" strategy, without the funny accent and nine months of winter. So many jobs that nobody will object to more immigration. What's wrong with this idea? Who wants to keep it the way things are? Unions? Simpleton central bankers? Politicians who want to keep the country polarized?

Posted by: johngalt at September 5, 2014 12:29 PM

Changes in hourly wages have to be adjusted for inflation. Real wages fell 1% in 2011 because inflation was still 3%, but the same hourly change in nominal wages became a 0.7% rise in real wages in 2013 and 2014.

Posted by: Alan Reynolds at March 16, 2015 8:00 AM | What do you think? [3]