Monday, April 8, 2019

Real Phillps Curve Update

Here are a couple of charts comparing real wage growth and unemployment.  My contention is that the Phillips Curve is real, not inflationary.  It only appears to be inflationary when monetary policy is procyclical.  When unemployment is low, real wage growth is higher, largely because of better matching, fewer frictions in labor markets, and higher labor productivity.

If we treat the Phillips Curve as nominal, then the inclination is to reduce growth to prevent inflation, and unemployment will be invariably driven higher in a misguided attempt at moderation.

If we treat the Phillips Curve as real, then the inclination is to celebrate low unemployment unconditionally, and allow the benefits of highly functional markets to continue to accrue.

There is a relatively stationary long term relationship between real wage growth (I prefer using CPI less food, energy, and shelter as the deflator) and the unemployment rate.

We shouldn't be afraid of real wage growth.  And, in either case, wage growth is humming along pretty close to the long-term trend.  Celebtrate that unconditionally.


  1. In the United States, real compensation for labor minus the rate of productivity is still below 2%, the Fed's putative inflation target. In brief, labor compensation remains a drag on the Fed's 2% target.

    Beyond that, one could easily argue that the whole point of macroeconomic policy should be higher real free-market wages. A nation with chronic "labor shortages" and higher wages is a happy place.

  2. OT but interesting.

    Lots of laundered money pouring into US real estate, stocks.


    This is a stunning report in many ways. Might make basis for Idio-blog.

    Housing more expensive globally...the part the OECD does not address is how much capital is flowing into housing....

    1. One of the agendas that has arisen for me is to fight this awful tendency to confuse ownership and consumption. Home prices are not the metric to use here. Everyone loves to bash the economics profession, but there really is a long way to go.