Federal Reserve can handle inflation, let job market grow because of labor productivity

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10/24/2021 3:28:00 PM

Opinion | The Fed doesn't have to choose between getting a handle on inflation and letting the job market get stronger. By pearkes.

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, but they're far apart on their concerns.On the one hand, wages are surging and measures of inflation are on the rise, suggesting the need to increase interest rates sooner rather than later. On the other hand, there are still millions of unemployed Americans with millions more staying out of the labor force and the job market is still recovering from the pandemic, suggesting the need to keep interest rates low to help increase employment. 

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But looking under the hood, there's good reason to believe that the Fed's choice and the winner of the argument may be clearer than it first appears.The conundrumLooking at measures of inflation and employment, it's easy to see why the Fed thinks it is in a bind. Median CPI, a broad gauge of consumer price inflation that focuses on the typical movement in prices over the course of the month, has soared to the highest levels since the 1980s. This measure is particularly illuminating because it indicates that the recent movement in prices has been much broader than a few pandemic-sensitive categories like used cars or hotel prices.

At the same time, the job market is still a mess: there are roughly 18 million people who don't have a job despite wanting one, or are working part-time because they can't find full time work.The combination puts the Federal Reserve in a difficult spot. As shown in the chart below, during the last two economic cycles when the job market was in a similar position, broad price pressures were weaker. That meant the Fed didn't need to make the trade-off between helping employment and fighting inflation. headtopics.com

George PearkesMuch as the Fed has been balancing two sides of the inflation-job market equation, there has also been the development of two teams fighting on either side. On one side is"team transitory," experts and academics who believe the inflation spike is still a function of pandemic disruptions, and inflation will start to cool off as supply chains sort themselves out. They argue there is no need to harm the labor market by increasing interest rates.

On the other side are the"inflationistas," who push back against team transitory by pointing to wage hikes. The concern is that when labor bargaining power is too high, higher wages will force companies to raise prices rapidly to cover ever-increasing labor costs — a wage-price spiral. These fears are backed up by data that shows non-managerial workers are seeing their wages grow at the fastest pace in nearly 40 years.

George PearkesBut a key part of the puzzle is being left out when these inflationistas argue that the 1970s — an era of high inflationandhigh unemployment — are going to play out again.Just because wages are going up, doesn't mean inflation is here to stay

Wage growth in and of itself is not bad; it's perfectly appropriate when pay is simply keeping up with a strong economy. But it can cause issues when it's rising too quickly and starts forcing price hikes elsewhere. So when do you know if wage increases are the good kind or the harmful kind?  headtopics.com

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The chart below shows two series. The first is GDP per hour worked, or how much value a worker can create in an hour (this measure is widely referred to as"productivity"). The other measure shows labor costs per unit of output, that is how much it costs a business to pay a worker to produce one unit of real output. 

Imagine a factory that uses some machines, some raw materials, and some labor to produce a product. When the factory adds a more efficient machine, workers can produce more with the same number of hours worked. That's an increase in labor productivity. Now, imagine workers threaten to strike and get a wage hike, but everything else stays the same: that's higher unit labor costs, because the wage bill is higher but output is unchanged.

The idea here is that if labor costs and productivity are moving up together, that's a much smaller problem than labor costs moving up on their own.Unlike the wage-price spiral of the 1970s, when the cost of labor rose sharply but productivity didn't rise to meet it, current labor costs per unit of output are keeping pace with the increased efficiency of businesses.

George PearkesLet's look at a real world example of why the surge in wages need not lead to a similar surge in inflation. Non-managers at restaurants and bars (average cooks, waiters, and bartenders) had seen a massive 22% annual jump in their wages through August. But the revenues pulled in by restaurants per hour worked by these employees has jumped from $60 per hour before the pandemic to a whopping $75 per hour. So while the cost to pay waiters and bartenders is soaring, it's not keeping up with the money their employers are bringing in.  headtopics.com

George PearkesOver the past two years, revenues per worker hour have gone up $11.15, compared to a production and non-supervisory wage increase of just $2.05. In other words, line workers are capturing 18% of incremental revenues per hour, less than the 22% of revenue per hour their wages accounted for in August of 2019. That's the exact opposite of what you'd expect in a  broad wage-price spiral.

This isn't to say higher wages haven't played some role in higher prices overall, but since the COVID recovery began, high commodity prices, supply chain disruptions,strong consumer demand, and the shift in spending from services to goods have all played bigger roles than labor markets. 

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By hiking interest rates in an effort to cool off the labor market in an attempt to reduce inflation, the Fed isn't going to address physical production bottlenecks. What they will do is hurt overall economic activity, with the biggest hit coming to workers and vulnerable Americans.

So long as productivity keeps rising, robust wage growth is not an automatic harbinger of higher inflation. Unlike the 1970s, there's evidence that businesses can keep getting more productive, pay people more to bring in those profits, and inflation can return to a level where the Fed is more comfortable.

The Federal Reserve can always throttle back economic activity by raising rates, but until there's good evidence that's the only way out, policymakers should exercise more caution than the inflationistas have so far.Sign up for notifications from Insider! Stay up to date with what you want to know.

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pearkes Thank you Amazon for that thought. pearkes 观点|美联储不必在控制通胀和让就业市场变得更强劲之间做出选择。作者pearkes。 pearkes Are you looking for a good company? This offer is for you!