The importance of (nominal stability) locking in full employment for the long haul

Josh Bivens and Ben Zipperer just released a paper with the title above, minus “nominal stability”.

The point I want to make is that if the Fed focuses on nominal stability (instead of any other target), the economy will likely operate much closer to “full employment”.

The second point of the paper´s summary is:

  • Equitable wage growth is linked with extended low unemployment. Since 1979, the only period of strong across-the-board wage growth occurred in the late 1990s and early 2000s, which was also the only period of extended low unemployment in recent decades. This coincidence of extended labor market tightness and healthy, equitable wage growth was not by chance.

The chart illustrates that the period of low unemployment is longer than the one the authors propose, extending from 1986 to 2007, during the “Great Moderation”. The chart describes the deviation of the unemployment rate to the natural rate of unemployment (taken as a measure of full employment). During the Great Moderation, that deviation is minimized.

The next chart shows that “strong across-the-board wage growth” also takes place during the Great Moderation. Note that rising nominal wage growth during the Great Inflation was “eaten up” by the fast rise in inflation, with real wage growth even falling for the most part. During the Great Moderation, inflation was falling and then remained low and stable, allowing for positive real wage growth.

During the Great Moderation, real output growth was also relatively stable, hugging close to its very long-term trend (call it potential if you like).

The fact is that during the Great Moderation, everything comes together, be it low unemployment, “equitable” wage growth and low and stable inflation.

Those “high-quality outcomes” flow from the fact that during the Great Moderation, monetary policy, even if unwittingly, kept nominal spending (NGDP) growth evolving close to a level growth path.

Some may argue that unemployment is now “very low”, that wage growth is stable as is inflation, real growth, and nominal spending (NGDP) growth. However, note that the “low unemployment” of today is a different animal from low unemployment during the Great Moderation. In addition, the stable rate of nominal spending (NGDP) growth and stable real growth of the last several years are attached to a significantly lower level path!

That´s the sense in which the economy is in a long (even if not “Great”) depression. With that evidence, I find it surprising that the theme of this weekend´s Jackson Hole gathering is “market power” (or concentration) as a force blocking higher wage growth.

Maybe the Fed has forgotten that more than 40 years ago, during the Great Inflation, monetary policy was viewed as powerless to control inflation because of, inter alia, the power of corporations. More than 40 years later, that same “power” is viewed as a force inhibiting higher wage growth!

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