US Unit Labor Costs Remain Drag On Fed’s 2% Inflation Target

The Q1 unit labor cost figures, released last week, again are revealed as a drag on the US Federal Reserve putative 2% inflation target.

The Q1 unit labor costs reading for the U.S is up 1.1% y/y and also up 0.8% from Q2…of 2016, reports the BLS via FRED.

Yes, you read that right. Unit labor costs are close to flat-lining.  If the Fed wants to hit its 2% target, and if it wants wages to help it get there, it will have to find way to get wage growth up.

Might one suggest stronger aggregate demand?

“Labor Shortages”

Back when I was in college, amid the Fortran cards and dial telephones, we were tutored there is no such thing as an economic “shortage,” and indeed the idea of “shortages” was the province of flabby, left-wing thinking.  Supply and demand settled all.

But for the last several years, the Fed Beige Books have been reporting labor and worker “shortages” across the 12 Fed districts.  From the latest Fed Beige book: “Reports of labor shortages over the reporting period were most often cited in high-skill positions, including engineering, information technology, and health care, as well as in construction and transportation.”

Of course, higher wages would retard retirement, and recruit part-timers into being full-timers. I know of one retiree who hired back on as a “consultant” for his former pharmaceutical-industry employer, and he inspects factories for regulatory compliance.  Given the huge bulges in semi-employed and recently retired, it seems logical “labor shortages” could be solved the old-fashioned way: Pay more.


Meanwhile, an average house in Seattle now retails for $820,000, and 69% of residential land is zoned for single-family housing.  Thanks to zoning and usual NIMBY crowd, building up in Seattle is hard to do.  It is the same situation along nearly the entire West Coast of the US.

Yet how does the Fed size up the housing situation in its 12 District, which encompasses the West Coast? No, no “housing shortages.”

In fact, the Fed said, “Activity in [12th District] real estate markets continued at a strong pace. Construction in the residential market picked up noticeably, limited only by the persistent shortage of labor and increasing material costs.”

Reading the Fed Beige Book, one would conclude it is “labor shortages” that made for the $820,000 average house price in Seattle.


If one takes Fed literature on faith, the central bank is woefully out of touch with what is causing inflation, certainly in large swathes of the country.

For investors, this presents a conundrum. The Fed will keep tightening, to stave off wage gains due to labor shortages (regardless of flat unit labor costs). New housing production, at anemic levels ever since 2008, will remain depressed.

The upshot may be not be less inflation in housing, but less economic growth.


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