Our favourite passage of Janet Yellen’s speech at Jackson Hole this year wasn’t actually in the text. It was in a footnote.
Specifically, footnote 7: “For convenience, the analysis here is presented as if cyclical factors and structural factors can be neatly delineated. In reality, the line between the two may be indistinct.”
Our initial reaction to the footnote was that it’s a banal but important point about economics in general. Even the biggest topics remain open to debate. Simplification is sometimes necessary to provide an organisational framework and a common jargon for discussing the relevant issues.
But the footnote was obviously there for a more specific reason, which was made clear in the rest of the speech: its relevance to the ongoing discussion within the FOMC and among economic commentators everywhere for the last couple of years. Read more
We live in disinflationary times, at least in the developed world.
This doesn’t mean that monetary and fiscal policies lack the potency to offset disinflation or deflation. What it means is that holding policy constant across time, non-policy economic forces have become less and less inflationary in recent years. Read more
Janet Yellen’s speech this Friday at the annual Jackson Hole symposium is titled, with understated simplicity and brevity, “Labor Markets”. The wider symposium is itself themed, “Re-Evaluating Labor Market Dynamics”.
And it’s no wonder. Even now, after more than a year of monetary policymakers and academics arguing about the amount of labour market slack and how much it should matter, most of the known unknowns in the debate remain, well, unknown.
In anticipation of the speech, the economics team at Credit Suisse has rounded up some of Yellen’s quotes on the labour market since she became Fed chair earlier this year (emphasis in the original, and my own thoughts follow the excerpt):
The uncertainty about the extent of US labour market slack continues, and last week’s employment situation report certainly didn’t clarify the issue. Read more
From her speech in Chicago:
One form of evidence for slack is found in other labor market data, beyond the unemployment rate or payrolls, some of which I have touched on already. For example, the seven million people who are working part time but would like a full-time job. This number is much larger than we would expect at 6.7 percent unemployment, based on past experience, and the existence of such a large pool of “partly unemployed” workers is a sign that labor conditions are worse than indicated by the unemployment rate. Statistics on job turnover also point to considerable slack in the labor market. Although firms are now laying off fewer workers, they have been reluctant to increase the pace of hiring. Likewise, the number of people who voluntarily quit their jobs is noticeably below levels before the recession; that is an indicator that people are reluctant to risk leaving their jobs because they worry that it will be hard to find another. It is also a sign that firms may not be recruiting very aggressively to hire workers away from their competitors. Read more
Just here for a bit of gap-bridging. Peacemaking. Common ground finding.
Evan Soltas and Robin Harding last week offered strong challenges to the try risking an overshoot argument made by Ryan Avent and me. Read more
Robin Harding pushes back against Cardiff’s argument that the Fed shouldn’t overreact to incipient signs of labor market tightness, and also against Ryan Avent’s contention that the Fed should try overshooting for once:
I think this argument is wrong and misunderstands the case for letting inflation overshoot when interest rates are trapped at zero. Read more
This post by the FT’s US economics editor Robin Harding is cross-published from FT Money Supply.
I think people are confusing two separate questions in the recent debate about wage rises and spare capacity in the US economy: first, the amount of slack left in the labour market, and second, whether the Fed should deliberately try to overshoot its inflation objective of 2 per cent. Read more
Here are questions to which the answers remain disputed:
1) To what extent will discouraged workers return to the labour force if the economic recovery accelerates? Read more
Remember the Yellen labour market dashboard?
Two of the five indicators she watched carefully before she became Fed chair are in the Jolts report, one of which is the quits rate (the hiring rate is the other). Read more
If Janet Yellen and the FOMC are breathing a sigh of relief after today’s jobs report, it’s probably just a very shallow sigh.
In the household survey, the unemployment rate inched back up to 6.7 per cent because of both new entrants to the labour force and weak employment growth. The Fed will certainly discuss at length how to change forward guidance at their meeting later this month, though they won’t have to discuss it with the rate having already crossed the 6.5 per cent threshold. Read more
Anyone who has tried to work out the extent of US labour market slack has risked getting lost in a thicket of detailed research.
The most obvious question, and easily the most debated, is whether discouraged workers who have dropped out of the labour force will return in an accelerating recovery — keeping a lid on wage growth and core inflation. James Bullard included a useful summary of the literature on this debate in his speech last week. Read more
Here’s the opening paragraph from Arthur Okun’s 1973 paper, Upward Mobility in a High-Pressure Economy:
The choice of an aggregate target of resource utilization remains one of the key issues facing policy makers and macroeconomists. Obviously, fuller utilization of labor and capital brings benefits in the form of extra incomes, output, and jobs; at the same time, it clearly imposes costs by increasing inflationary tendencies. Various economists see these benefits and costs very differently. Henry Wallich once suggested that macroeconomists could be classified into advocates of “high pressure” and “low pressure” operation of the economy. At the present time, the controversial range for the target unemployment rate extends from 4 to 5 percent. Generally, high-pressure advocates concede that, with existing labor market institutions, unemployment rates below 4 percent would be associated with unacceptable inflation; while most low-pressure advocates agree that unemployment rates above 5 percent are intolerable.
It’s been easy to lose track of the dueling research papers and notes published in the last year that have tried to discern the causes behind the demographic-adjusted fall in the US labour force participation rate.
The resulting confusion, specifically about whether those causes are mainly cyclical or structural, has led to uncertainty about what the Fed will do if the unemployment rate falls to or below the 6.5 per cent threshold (the rate is now at 6.7 per cent). Consequently it has weakened the FOMC’s commitment to keeping rates low for as long as its members have forecast. Read more
The final FOMC statement of the Bernanke era included nothing unexpected, which didn’t stop markets from expressing disappointment.
But looking ahead, there are at least two reasons why the Yellen Fed might soon consider, or at least should consider, downplaying the unemployment rate threshold in its forward guidance in favour of a greater emphasis on inflation. Read more
As a reminder, the big unknown about the US labour market is the extent to which the demographic-adjusted decline in the labour force participation rate has been caused by cyclical vs structural trends. And in addition to the decline in the unemployment rate, a few other economic indicators suggest the potential for a near-term increase in wages.
From a note by Paul Ashworth of Capital Economics: Read more
Here’s a rough sketch of the variables influencing US inflation, which has been remarkably low for two years running:
1) The remaining labour market slack, including a staggering and resilient long-term unemployment problem. The amount of slack remains tough to know given the difficulty of measuring the cyclical vs secular components of the fall in the labour force participation rate. Much more on this later.
2) The output gap. This isn’t a well-defined idea, we know, but few people would argue that the US economy is producing at potential. The US economic recovery does appear to have accelerated in the final two quarters of last year (the December jobs report notwithstanding), and the conditions for growth look better than they have in years. If the nascent acceleration proves sustainable, then the labour market may well tighten up and push wages higher. Obviously this is related to the first point about labour market slack, and plenty of caveats are needed given the head-fakes of the last four winters. Read more