January 9th, 2015

So Why Is Wage Growth Negative?

Coverage of the most recent employment report has been ... mixed, to say the least. Obvs, when you get unemployment down to 5.6% and underemployment dropping as well, it's hard to present it as bad news. On the other hand, BI can find the negative anywhere:

http://www.businessinsider.com/this-was-a-terrible-jobs-report-2015-1

True, wages actually dropped. Here is what McBride has to say about the report:

http://www.calculatedriskblog.com/2015/01/employment-report-comments-first-come.html

"Looking forward, hopefully 2015 will be about "wages". My thinking is first come the jobs, then comes the real wage growth."

"Unfortunately there was disappointing news on wage growth, from the BLS: "In December, average hourly earnings for all employees on private nonfarm payrolls decreased by 5 cents to $24.57, following an increase of 6 cents in November. Over the year, average hourly earnings have risen by 1.7 percent." But wages will hopefully be a 2015 story."

Here is something that I would hope would be obvious to everyone, but apparently is not.

The last people to get hired do not tend to be hired at the top end of the wage curve. In fact, I would argue, the opposite is probably true. And wage pressure historically has not really manifested until unemployment overall was under 5% anyway.

Seeing negative wage growth now is sort of like watching median house sales price _rise_ as the bust developed. Luxury real estate lags, so when fewer houses were sold, a higher proportion of them was higher in price. Similarly, as we slowly came _out_ of the bust, median sales price _dropped_, which was expected and fine, because it meant that starter family and condo sales were finally happening as mortgages became available again.

I assume that people have trouble with this because they have conflated stages in economy improvement/deterioration. (The alternative explanation is that people basically have no fucking clue about how prices are set, which honestly, is probably a better explanation, but I find it profoundly depressing because, you know, we kind of live in a capitalist society and prices are sort of a central part of capitalism and if we don't get that then Sad.) It can be hard to keep the details straight, if you don't sit down and think it through in terms of what actual people are doing around you. It's also confusing if everyone you know is Just Like You -- you do need to have contact with a range of socioeconomic status and background to really get a sense of how this develops over time.

I think I've found someone saying what Krugman is so worried about

Krugman spends a lot of time arguing that people think the Fed should/is about to raise rates, and the Fed should not do this because of asymmetric risks associated with deflation (nearly unmanageable) vs inflation (just raise rates and it comes right down -- the inflation of the 1970s was in part an artifact of the Fed not being willing to raise rates (enough)). I think Krugman is maybe overselling the stupidity of commenters, but today I saw something on BI that was almost exactly the argument Krugman has been railing against. Go figure! That wasn't a Straw Man after all -- someone really is that stupid.

Here it is:

http://www.businessinsider.com/the-oil-price-collapse-is-making-the-federal-reserves-job-almost-impossible-2015-1

Tomas Hirst says:

"That is, rate hikes may be put on hold until people start seeing the benefits of growth in their take-home pay. Moreover, with global fears over the prospect of deflation gripping much of the developed world, the FOMC body could find itself under pressure to hold off rate hikes while inflation remains below target.

But there are big risks to this strategy. If the dip in inflation due to commodity-price falls helps to mask the underlying strength of the US economy, once they stop falling inflation could come surging back and be much more difficult to control."

The first of those two paragraphs is accurate. The second one is insane. This is the _low risk_ side to make the error on. And it's clear why Hirst is worried. Hirst's idea of scary inflation is ... 5%.

Ha ha ha ha ha ha ha.

See, here is the Big Scary time he refers to:

"The Fed most recently faced this problem in the 1980s, when low oil prices spurred runaway growth. The Fed took its eye off the ball at the time, leading to nearly 5% inflation by 1990."

One thing I've noticed about Millenials. The most recent bust doesn't seem to have freaked them out nearly as much as it has older cohorts. That is really puzzling to me, because Millenials are the ones really getting hurt by deflation/disinflation/low inflation/below trend growth, etc. Their student debt should be being erased by inflation. They should have jobs. And they should be enjoying better wages over time in a growing economy. I have to assume that at some point, they'll figure it out and get really mad and insist on pro-growth policies. Goddess I hope so.

Found my cold limit

I like the cold. I really, really do. But I shoveled the driveway, then went for a half hour walk. Later, I went for a longer walk with R. Towards the end of that walk, I realized my back hurt, probably from shoveling and sweeping snow (a few times lately). So I took a couple aspirin, had a blondie and crawled under the new electric throw. And could not for the life of me get warm. I gave it a good shot -- all the way through a Sam Smith album on the Pioneer AirPlay speaker -- and then made dinner and had a glass of sake.

Miraculously, I am now warm. Go figure. Food matters.