Macro Man only has time for a few brief thoughts today as the universe the world the country the market awaits Janet Yellen's latest thoughts with bated breath.
In his brief tenure back at the helm of the good ship MM, readers may have detected hints that your author is somewhat less than impressed with the Fed's current grasp of the economy. That our august central bankers persistently overestimate both the level of output and the unemployment rate suggests that trend growth is quite a bit lower than they have believed (though in fairness, the long-term SEP forecasts have finally come lower.)
No doubt that Ms. Yellen will be asked about, or perhaps may volunteer, her displeasure at the relatively limp growth in wages, the last few months' recovery notwithstanding. She may even hint darkly that tepid wage growth is yet another reason tocarry out more nefarious Woodfordite plots maintain "policy accommodation."
Alas, even a casual analysis would appear to suggest that the Fed has yet to realize that it's a global labour market these days. From 1990 to 2000, for example, the contemporaneous correlation between the unemployment rate and wage growth was -0.77. Thereafter, it has fallen to -0.68, with a significant wedge in the relationship appearing to open over the last year or two.
One of the notable things that occurred early in the last decade, just before the last sharp decline in wages, was of course the accession of China to the WTO and the sharp increase in outsourcing and globalization. If we compare world unemployment (sadly reported only quarterly on Bloomberg) with US wages, what do we see? Optically, a substantially better fit than the link with US unemployment over the equivalent time period.
Mathematically, it's a better fit as well, with a correlation of -0.80. On this evidence, if Ms. Yellen wants US workers to get paid more, she's going to have sort out the rest of the world. Is it too late to nominate Spottswoode, Gary, and the rest of Team America to the Federal Reserve Board?
In his brief tenure back at the helm of the good ship MM, readers may have detected hints that your author is somewhat less than impressed with the Fed's current grasp of the economy. That our august central bankers persistently overestimate both the level of output and the unemployment rate suggests that trend growth is quite a bit lower than they have believed (though in fairness, the long-term SEP forecasts have finally come lower.)
No doubt that Ms. Yellen will be asked about, or perhaps may volunteer, her displeasure at the relatively limp growth in wages, the last few months' recovery notwithstanding. She may even hint darkly that tepid wage growth is yet another reason to
Alas, even a casual analysis would appear to suggest that the Fed has yet to realize that it's a global labour market these days. From 1990 to 2000, for example, the contemporaneous correlation between the unemployment rate and wage growth was -0.77. Thereafter, it has fallen to -0.68, with a significant wedge in the relationship appearing to open over the last year or two.
One of the notable things that occurred early in the last decade, just before the last sharp decline in wages, was of course the accession of China to the WTO and the sharp increase in outsourcing and globalization. If we compare world unemployment (sadly reported only quarterly on Bloomberg) with US wages, what do we see? Optically, a substantially better fit than the link with US unemployment over the equivalent time period.
Mathematically, it's a better fit as well, with a correlation of -0.80. On this evidence, if Ms. Yellen wants US workers to get paid more, she's going to have sort out the rest of the world. Is it too late to nominate Spottswoode, Gary, and the rest of Team America to the Federal Reserve Board?
14 comments
Click here for commentsC Says
ReplyIt's a problem that needs fiscal action ,not monetary. Has been for a long time.
Indeed, you want to actually create some inflation then I suspect that in principle it would be easy whilst in practice virtually impossible. Get the G7 and preferably the G20 to increase the minimum wage level prorate across the spectrum of countries. That will chase consumption and prices up which is what they have been trying to do isn't it? Trying to do that with stagnant incomes across the mass population isn't gong to happen short of a 'war' shock.
Actually in the Uk they have been trying to do this in a sense by making some fairly substantial changes to the Personal tax allowances which has the same effect on disposable income as a wage increase. I think that's slipped by a bystanders and it's why the consumers being doing rather better of late in the UK.
ReplyReally? Fiscal action in a world hamstrung by debt? GL
ReplyC says
ReplyMars,
perhaps you would be kind enough to explain to me an alternative method of improving the servicing of that debt other than by fiscally increasing incomes. Yes ,we know default blah,but if we wanted to do that we should have done it a few years ago. As it stands the austerity method as we see simply makes the debt/GDP ratio worse,hardly surprising. Moreover the reason why this works is because you make it virtually generic. No country get's to game it for a competitive gain which is what tends to happen with so called monetary policy.
Debt and excess supply ,insufficient demand is a global problem that's why it needs a global solution. As it stands each country has gone for the beggar thy neighbour approach and as it sads that does not look like it is going to do the reflation job of closing that output gap and improving servicing that debt.
C Says
Reply"sads" .Freudian slip meant stands ,but perhaps the slip is more descriptive of the issue.
C Says
Reply"GL", I quote myself , "I suspect that in principle it would be easy whilst in practice virtually impossible".
The problem with this species is it all appears to know what it wants whilst so little of it appears to know what it needs.
I remember Sir James Goldsmith's appearance on Charlie Rose back in 1994:
Replyhttp://www.youtube.com/watch?v=4PQrz8F0dBI
(5 parts)
I remember my father commenting, asking how the government of the US could do that to it's citizens.
Well they did it and my father lost his job a couple of years later.
According to the latest BLS stats:
April 2014:
9.75 million Americans are “unemployed”
92.02 million Americans that are “not in the labor force”
Total of 101.77 million working age ( Age 16-64 ) Americans without a job.
April 2000:
5.48 million Americans were unemployed
69.27 million Americans were “not in the labor force”
Total of 74.75 million working age Americans without a job.
A rise of 27 million since 2000.
C says
ReplyAnon 122.
Thank you for the link. Makes one aware yet again just how visionary someone like Goldsmith was and emphasises it in a debate with poor Charlie who can't really grasp the argument.
C is right. Fiscal stimulus with a focus on our rapidly decaying infrastructure. Visit Asia or Scandinavia if you want to see what modern cities look like. Visit Ashland, Ky or Huntington, W Va if you want a peek at the third world.
ReplyIt's also time for real TAX REFORM in order to finance it. Why does LB pay ~40% effective tax rate on his earnings, then pays again if he saves it, pays again (and again, annually) on the yield or dividend income if he invests it, and on the tax accountant to decipher the AMT and other bizarre perversions within the code?
Meanwhile, Mr Billionaire "Ku Klux Klan" Koch, Henry "Million Dollar Birthday Party" Kravis and "Fuck the 47%" Mitt Romney pay a nice 13%. The super-rich need to bend over, it's simply their turn. This isn't about envy, it's about fairness. The looting has gone on long enough.
By the way, to change the topic, how many bps are embedded in the US10Y b/c of Ukraine? What size is the mini rate spike if there is a ceasefire deal? 10? 20? Or is the bond buying due to the US economy being in rece... I mean, a soft growth period?
ReplyTax reform...even when the same party controled WH, senate, and house, it did not happen. go figure...
ReplyIs growth stock going to come back after summer? Has everyone sold them and was on their way to the beach?
Macroman, I drafted you chart back to the mid-1980ies... Looks like the correlation was already pretty strong in the early 1990ies... Globalization was just beginning then. Does it change your conclusion ?
Reply@Anon1:22
Reply101 million Americans(working age) without a job..so how do they survive?
Evariste, did you get global unemployment data going back that far? I could only find it from the mid-late 90's.
ReplyI guess the real pertinent issue is the change in relative correlations between the domestic unemployment rate and the global one in terms of their relationship to domestic wages.