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Posted by Jared Bernstein.
From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team.
Well, what a coinky-dink! Just in time for the Federal Reserve’s Open Market Committee meeting tomorrow where they’ll be discussing the liftoff date for the interest rate they control, economist Josh Bivens has a smart new paper out on the importance of considering wage trends in the mix, written for our full employment project.
Here, in his words followed by a bit of annotation from moi, is his logic:
[Also, the share of involuntary part-timers remains elevated, so there’s considerable “under-employment” as well. Using Levin’s measure of slack, this and the part Josh mentioned re the labor force would add more than a point to the unemployment rate.]
[Maybe 2-4 percentage points, in terms of a confidence interval around their natural-rate estimates, which is, as Josh says, large. BTW, did you see this? New report from a couple of Fed economists that backs out a “natural rate” slightly north of 4%.]
[Productivity growth and unit-labor costs loom large in the Bivens analysis, as they should. It was accelerating productivity growth that gave ol’ Al G-span the idea to let the unemployment rate fall below what they thought was the natural rate back in the 1990s: ~6%! Trend productivity growth is lower now—around 1.5%–and that’s a constraint. But there’s still considerable room for non-inflationary wage growth. The Biven’s benchmark target for non-inflationary nominal wage growth is basically the Fed’s inflation target–2%–plus the trend growth rate of productivity–1.5%. So, 3.5%.]
[Tru dat! See Larry Ball’s most recent paper from our series.]
[OK, this is my fav point, one that I’d like everyone in this debate to either make a big, damn deal out of or explain to me why it’s not a big, damn deal. It’s a bit of a gnarly point but it comes down to this: thanks to job market slack and high levels of inequality, much of the income growth in this recovery has gone to profits, not wages. Another non-inflationary way in which wages can grow—even when they’re growing faster than the 3.5% benchmark Josh identifies—is through shifting some of that growth back to paychecks. In technical terms, it’s the rebalancing of factor shares, and as Josh’s Figure 7 shows, it means there’s considerably more room for wages to grow. EG, with “excess wage growth” 1.0 percentage point above the 3.5% benchmark—so, nominal wage growth of 4.5%–it would take eight years, until 2022, for the compensation share of national income to revert to its pre-recession level.]
I already said “tru dat!” so how about “I feel ya, Josh!” I only hope Janet and co. are listening.