Slacktivist monetary policy
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How much slack is there in the labor market? That is, how close is the American labor market to full employment? The answer to that question is important, says Evan Soltas, because estimating whether the economy is near its potential affects what, if anything, policymakers actually do to help the economy. No one is quite sure, but Paul Krugman argues against the emerging consensus that says “even though we still have huge unemployment, we’re actually running out of employable workers”.
Soltas divides the two economic camps into the slackers and the quitters. The slackers, including Fed chair Janet Yellen, as well as Krugman, think the economy still has a long way to go before it’s back at its full potential, therefore the Fed should continue to help it along. The quitters think there’s very little slack in the labor market, especially for the short-term unemployed, and therefore the Fed should think about raising interest rates to stem coming inflation.
In the quitters camp is the New York Fed’s Henry Linder, Richard Peach, and Robert Rich, who in a recent paper found evidence that “the long-duration unemployed exert less influence on wages than the short-duration unemployed”. Soltas sees this as “a sign that the job market is working for some even as it fails others”. When wages are going up as they are now (albeit slowly — around 2%), that implies the advantage in the labor market is shifting toward workers, and therefore there’s not much slack.
However, Krugman points out that wages normally rise during bad weather — like this winter — because low-wage workers are more often unable to work than their white-collar counterparts. Jared Bernstein looks at both quit rates in yesterday’s JOLTS report and short-term unemployment rates and thinks the economy still isn’t at its potential. Dean Baker says much the same thing. If you go back a decade or more, says Bernstein, neither metric is back to normal. “I don’t think an objective person would look at the end of the lines in the figure and conclude: ‘our work is done here, folks’”, he writes. – Shane Ferro
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