Our close friend Scott Sumner seemed to fall into a trap at the weekend, heralding the 2.9% year on year growth in Average Hourly Earnings as making it “almost impossible to continue arguing for labor market slack”. Well, it is good he had the caveat, as the AHE data series that grabbed the headlines looks highly questionable.
Relying on journalists and the rest of the crowd leads to big mistakes. Year on year Average Weekly Earnings growth for “Production and Nonsupervisory Employees: Total Private” fell from 2.1% to 1.9%. “Almost no slack” makes almost no sense.
The 2.9% figure that grabbed the headlines is for the relatively new series of “All Employees: Total Private” that adds about 20 million employees to the much more established P&N Employees total of around 100 million.
These 20 million, who earn an average of $85k per year, the concept of AHE is meaningless, rendering the AHE series meaningless too. For the record, both series show employees working less hours per week (AWH) even as the AHE rises. Hence the flat or falling AWE growth.
In reply to my similar comment, Scott said that he wasn’t interested in AWE, only AHE, because only AHE show sticky wages.
As we showed in this pay walled post a couple of months ago, AWE is sticky. In fact, it is a far better guide to nominal income trends than AHE.
Looking at the chart above for “All Employees: Total Private”, as Scott and many others do, shows that it would be truly disastrous to look at that AHE as a guide. It actually rose in 2008 as the economy was collapsing and the Fed’s lackadaisical responses meant strong, effective, tightening of monetary policy.
In fact, Scott and others don’t need to look at our chart here, just look at the chart at the top of his own blogpost. Was Scott writing that there was “almost no labor market slack” in late 2008/early 2009 as AHE surged? Or, what about 2010?
The longer run data set of “Production and Nonsupervisory Employees: Total Private” showed AHE flat as the recession kicked in and would have not been as misleading.
It may be that the better paid, non-hourly, workers in the All Employees data set do show more flexibility in pay as bonuses can be increased or cut. That is a good thing. However, those 20 million account for 18% of the total All Employees but 33% of the total income pool because they earn over 2 times the annual earnings of their Production and Nonsupervisory peers. Their income severely damages the usefulness of the AHE figure for All Employees.
For the vast bulk of workers, there are no bonuses. Seventy two percent are Production and Nonsupervisory Workers earning an average $35k per year. They are just people doing their jobs as best they can, with no additional incentives. Hours are cut and jobs get lost due to downwardly sticky hourly wages. The volatile earnings of the better off should not be used to guide monetary policy. Scott needs to look more closely at this issue.
The small declines in AWH are a concern currently, just as they were in 2008. They drag down AWE and could presage a recession, one that could quickly come about in a low NGDP growth environment.
One big error leads to another
Going even further astray, Scott then went to make the even more contentious claim that “there is no longer any respectable argument for monetary or fiscal stimulus.”
Quite apart from the question of whether there has been any monetary stimulus for the past eight years, to say there is no respectable argument is astounding.
There has been no recovery from the 2008-2009 recession, with the economy remaining in a “Long Depression”, even if there has been some growth. Recovery would imply a return towards the pre-2008 trend growth in RGDP.
Sure, unemployment rates have dropped, but prime age Labor Force Participation is still poor. Productivity is still weak, as real growth is so weak. Almost all of the real growth is made up by the increase in the labor force. Hence, per capita measures of real income remain horrible. Productivity growth is the child of labor shortages; there are no labor shortages in the US.
Maybe the US economy is reaching some sort of take-off point, pumped up by Trump’s plans, but that is no reason at all to move to a neutral monetary policy let alone a tightening policy.