Let’s start today with a (relative) quickie. On Wednesday, I posted on a bizarre idea that appeared in the minutes of the last Federal Reserve Open Market Committee meeting that were published that morning: the belief on the part of some Fed policymakers that the economy could suffer disturbing levels of overall inflation without seeing much wage inflation at all.
As I argued, this notion is bizarre because it suggests that America can somehow generate significantly stronger growth even as the typical worker keeps struggling to pay for the current level of goods and services turned out by U.S.-based businesses. I further observed that it’s hard to identify substitutes for more prosperous Main Street Americans as customers for expanded output.
This morning, the idea of a stronger “wage-less” or “consumer-less” recovery came up again – albeit indirectly – in Fed chair Janet Yellen’s keynote speech to the big central bank conference taking place in Jackson Hole, Wyoming.
According to Yellen, the Great Recession seems to have seen significant “downward rigidity” in wages unadjusted for inflation. In plain-speak, employers often could not or would not reduce wages as much as the dreadful economic conditions indicated they would. One key result, Yellen explained, may be “pent-up wage deflation.” Therefore, she continued, companies “may find that now they do not need to raise wages to attract qualified workers” as the labor market strengthens, and even as recovery speeds up, “wages might rise relatively slowly….”
The problem with this analysis, though, is the same one spotlighted in Wednesday’s post. It suggests that the labor market can strengthen – presumably because of increased economic activity – even though a critical mass of American workers still won’t be able to afford buying the higher supply of goods and services created by that activity.
Yellen indicated that pent-up wage deflation by definition is not a fixture on the American economic landscape. And if it’s not, “wages could begin to rise at a noticeably more rapid pace once [it] has been absorbed.” Yet that may not even be true in theory – whether or not the “more rapid pace” is adequate to overcome the inadequate demand problem. After all, American wages have been rising only sluggishly at best for decades, largely because of structural changes also identified by Yellen (and so many others) – like substantial job offshoring and its easy availability for employers, or job-displacing technological change.
Arguably more revealing: U.S. wage growth was pretty weak even during the bubble decade – when both monetary policy and fiscal policy were unprecedentedly loose by peacetime historical standards up till then. Not that this wage stagnation – and its damaging effects on healthy growth – are mainly or even significantly the fault of Yellen, the Fed today, or even previous Feds. But its persistence makes it all the more important that monetary policymakers make clearer than ever to other U.S. leaders that real prosperity can’t possibly be restored unless they get their acts together, too.