pgl, Kevin Drum, and Dean Baker took the opportunity of yesterday's employment report -- which included the news that average hourly wages continue to rise -- to do a little lobbying of the Fed on behalf of the working folk. Says Drum:
WAGES UP....FED IS WORRIED....
Boy, I sure hope the Fed doesn't do anything to put the kibosh on this. Workers could use a break. But I'm sure Ben Bernanke realizes....um, realizes that — what? He said what? Oh, this:
Wages have risen so swiftly that some economists worry that they could push inflation up on their own, by forcing companies to raise prices. Last week, the Federal Reserve chairman, Ben S. Bernanke, warned that the central bank might have to raise interest rates again. “One factor that we are watching carefully is labor costs,” he said.
pgl is calmer, but basically agrees:
If Chairman Ben thinks the labor market is overheated, I respectfully disagree.
... economists (including Federal Reserve Board chairman Ben Bernanke) are very worried about wage growth, but it would have been worth noting the implication of this statement. It implies that some economists believe that it is unacceptable for workers to enjoy any wage gains – as soon as they start to experience wage gains, inflation is a problem.
Many economists (perhaps most) hold a view like this, but the public should be aware of this issue because it raises fundamental questions about economic policy. Is the Federal Reserve Board always going to turn off economic growth whenever the labor market tightens enough so that workers can benefit? If this is the policy, shouldn’t the people know?
The answer is that people should know what the policy is, so let me share what I think I know. First, let's turn to Ben:
The Federal Reserve today retains important responsibilities for banking and financial stability, but its formal policy objectives have become much broader. Its current mandate, set formally in law in 1977 and reaffirmed in 2000, requires the Federal Reserve to pursue three objectives through its conduct of monetary policy: maximum employment, stable prices, and moderate long-term interest rates.
I think it safe to assume that maximum employment means maximum sustainable growth consistent with the labor supply decisions of households, and that maximum sustainable employment growth defined in this way implies maximum sustainable growth in real wages.
Second, as I've said many times on this site, it's not the wages that inflation-watchers worry about, it's wages adjusted for productivity growth. In this regard, it was the the unit labor cost report earlier in the week that was important, not the average hourly wage statistic buried in the employment report.
I am not so convinced that even broad, productivity-adjusted labor cost measures have held up very well as reliable predictors of inflation. Furthermore, competing measures of labor costs that are inclusive of nonwage payments -- the labor compensation measure used to construct unit labor costs and the Employment Cost Index (ECI) -- are not exactly sending the same signals:
The major difference in the behavior of those series appears to be related, at least in part, to the fact thatthe nonfarm compensation series includes things like compensation in the form of stock options. The ECI does not include these sorts of benefits, and I consider it an open question as to which one of these series is the appropriate one, for whatever question you want answered. But if you want to worry about Fed policy, it may be better to dive into that debate, which is much more likely to occupy a central place in the ever-grinding minds of policymakers.
UPDATE: I neglected to point out that Dean Baker did weigh in on the unit labor cost issue. His admonition to not get carried away with rising labor costs survives.