While the US Federal Reserve manifests ever-rising hysteria regarding “tight labor” markets in the US, and Martin Feldstein warns of inflationary holocausts, unit labor costs have been….falling in the US.
The Bureau of Labor Statistics reported Dec. 6 that Q3 unit labor costs fell 0.7% YOY. To smoothen short-term noise, the 4-quarter moving average of ULC year-on-year growth has moved into negative territory, a pattern consistent with post-recession periods, when productivity rises and labor compensation growth lags.
Tellingly, unit labor costs are now below levels of Q4 2015.
The untold story is not of rising wages but rather of US employers finally buying plant and equipment—which makes some sense, as the US economy is at long last putting up some decent numbers. Productivity is rising modestly, holding labor costs flat by offsetting modest (very modest) wage gains.
However, the mounting self-congratulations at the Fed and elsewhere on the 2017 US economic performance—sullen growth and dead inflation—is hardly warranted.
The US economy has foregone trillions upon trillions of dollars in real output—read lost profits and wages—since 2008 to satisfy the Fed’s perennial and large over-estimates of pending inflation. The Fed should have been far more forceful in growth-oriented monetary policies, or better yet, adopted NGDP level targeting.
A Sad Laugh Déjà vu Style
“With the U.S. economy reaching the lowest unemployment rates in 30 years and the employed share of the adult population at an all-time high, today’s primary concerns are labor shortages and inflationary pressures resulting from tight labor markets.
According to many predictions, the 1995-1996 unemployment rates of 5.5 percent should have already led to excessive wage growth. In a recent estimate, Akerlof, Dickens, and Perry (1996) concluded that the rate of unemployment consistent with no increases in the inflation rate was in the 5.5-6.0 percent range. The U.S. experience of 1997 and 1998 cast doubt on these and similar projections. Even after reaching 4.5 percent unemployment rates, the U.S. economy has yet to experience inflationary wage pressures.”
The above was published by the Department of Labor in late 1999.
Even if the US experiences some inflation in coming years, likely it will not be from labor costs.
Housing costs are soaring in many metropolitan regions, primarily due to suffocating property zoning, and possibly exacerbated by inflows of capital from offshore. Nationally, house prices are up more than 30% since Q2 2012.
As Kevin Erdmann has pointed out, the core CPI sans housing is rising at a 0.7% annual rate.
The Fed and other macroeconomic policymakers could make themselves useful by generating and then publicizing effective methods to tackle housing shortages.
Or they could fret some more about tight labor markets.