By almost every measure there continues to be a great deal of slack in the labor market. Unemployment rates remain high even for college graduates and even college graduates with degrees in the STEM fields have since little increase in wages in recent years.
Given this backdrop, it is not clear what information the NYT thinks it is giving readers when it reports :
“His company [a cable start-up based in Denver] has created about 60 jobs in the past year, but Mr. Binder said that vacancies often showed the structural problems in the economy. His business sometimes struggles to find qualified candidates for technologically demanding positions, but it is deluged with 700 applicants when it needs to hire an accountant.”
The normal way in which businesses attract qualified candidates is by offering higher pay. Clearly these candidates exist, they just might work for Mr. Binder’s competitors. Insofar as Mr. Binder’s difficulties in getting qualified candidates for technologically demanding positions is evidence of a structural problem, the problem is that we have people in top positions in businesses who apparently do not understand how the labor market works.
By almost every measure there continues to be a great deal of slack in the labor market. Unemployment rates remain high even for college graduates and even college graduates with degrees in the STEM fields have since little increase in wages in recent years.
Given this backdrop, it is not clear what information the NYT thinks it is giving readers when it reports :
“His company [a cable start-up based in Denver] has created about 60 jobs in the past year, but Mr. Binder said that vacancies often showed the structural problems in the economy. His business sometimes struggles to find qualified candidates for technologically demanding positions, but it is deluged with 700 applicants when it needs to hire an accountant.”
The normal way in which businesses attract qualified candidates is by offering higher pay. Clearly these candidates exist, they just might work for Mr. Binder’s competitors. Insofar as Mr. Binder’s difficulties in getting qualified candidates for technologically demanding positions is evidence of a structural problem, the problem is that we have people in top positions in businesses who apparently do not understand how the labor market works.
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Other news sources just told us what the Republicans said in reaction to President Obama’s State of the Union Address, National Public Radio told us what they really thought. Its top of the hours news summary on Morning Edition (sorry, no link) told listeners that Republicans “see it as more tax and spend.”
Other news sources just told us what the Republicans said in reaction to President Obama’s State of the Union Address, National Public Radio told us what they really thought. Its top of the hours news summary on Morning Edition (sorry, no link) told listeners that Republicans “see it as more tax and spend.”
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I thought that reporters had finally learned that monthly wage data are erratic and best ignored, but noooooooo, they apparently still believe that they give us real information about the rate of growth of wages. The immediate cause for complaint is a Morning Edition State of the Union fact check segment in which Scott Horsley told listeners that wages rose in November, but then fell in December.
As I tried to explain after the big wage jump in November was reported, the monthly changes are dominated by noise in the data. The 0.4 percent nominal wage rise reported in the month followed a month where the wage reportedly rose by just 0.1 percent and a prior month where it did not rise at all. Employer pay patterns in the economy as a whole do not change that much from month to month, it should have been obvious this was just noise in the data.
The wage drop reported in December should have further confirmed this. Horsley tried to explain the drop as a composition story, that we hired more people in lower paying industries. This is hard for two reasons. First, we added 48,000 jobs in the high-paying construction industry in December, compared to just 20,000 in November. We added only 7,700 jobs in the low-paying retail sector in December, compared to 55,700 jobs in November. In other words, the mix story seems to go the wrong way.
The other reason is the mix from month to month can only make a marginal difference in average wages. To see this, let’s take an extreme case. The gap in pay between the construction sector and the overall average is just over $2 an hour. By contrast, pay in the leisure and hospitality sector is about $10 an hour less than the average. Suppose that we saw 100,000 new jobs in construction and no other jobs in any other sector. This is equal to approximately 0.07 percent of total employment. This means this jump in construction employment would raise wages by less that 0.2 cents an hour. By contrast, the surge in restaurant employment would lower the average hourly wage by 1.0 cent.
In other words, even these extraordinary shifts in composition would have no measurable effect on the pace of wage growth. Anyone looking to explain month to month changes in wages by job mix is looking in the wrong place. The only responsible way to report on the wage data is to take averages over longer periods, the monthly changes simply don’t mean anything.
I thought that reporters had finally learned that monthly wage data are erratic and best ignored, but noooooooo, they apparently still believe that they give us real information about the rate of growth of wages. The immediate cause for complaint is a Morning Edition State of the Union fact check segment in which Scott Horsley told listeners that wages rose in November, but then fell in December.
As I tried to explain after the big wage jump in November was reported, the monthly changes are dominated by noise in the data. The 0.4 percent nominal wage rise reported in the month followed a month where the wage reportedly rose by just 0.1 percent and a prior month where it did not rise at all. Employer pay patterns in the economy as a whole do not change that much from month to month, it should have been obvious this was just noise in the data.
The wage drop reported in December should have further confirmed this. Horsley tried to explain the drop as a composition story, that we hired more people in lower paying industries. This is hard for two reasons. First, we added 48,000 jobs in the high-paying construction industry in December, compared to just 20,000 in November. We added only 7,700 jobs in the low-paying retail sector in December, compared to 55,700 jobs in November. In other words, the mix story seems to go the wrong way.
The other reason is the mix from month to month can only make a marginal difference in average wages. To see this, let’s take an extreme case. The gap in pay between the construction sector and the overall average is just over $2 an hour. By contrast, pay in the leisure and hospitality sector is about $10 an hour less than the average. Suppose that we saw 100,000 new jobs in construction and no other jobs in any other sector. This is equal to approximately 0.07 percent of total employment. This means this jump in construction employment would raise wages by less that 0.2 cents an hour. By contrast, the surge in restaurant employment would lower the average hourly wage by 1.0 cent.
In other words, even these extraordinary shifts in composition would have no measurable effect on the pace of wage growth. Anyone looking to explain month to month changes in wages by job mix is looking in the wrong place. The only responsible way to report on the wage data is to take averages over longer periods, the monthly changes simply don’t mean anything.
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Robert Samuelson used his column on Monday to debate the need for the Fed to clamp down on wage growth and came down on the right side: hurry up and wait. This is good to see, but there are a few more data points that make the case even more strongly.
First, the quit rate — the share of unemployment due to people voluntarily quitting their jobs — is still at levels that we would expect in a recession. This is important because it is a relatively direct measure of workers’ confidence in their labor market prospects. If they are unhappy at their job, but they don’t feel they have much opportunity to find a better one, they will be reluctant to quit unless they have a new job lined up.
Percentage of Unemployment Due to Job Leavers
Source: Bureau of Labor Statistics.
The second noteworthy point is the high number of people who report working part-time involuntarily. We can debate the reasons that prime age workers might have dropped out of the labor force, but there is no plausible case that people who work part-time jobs and say they want full-time employment, don’t actually want full-time employment. This number is still up by more than 2 million (@ 50 percent) from pre-recession levels, suggesting a large amount of labor market slack.
The last point is that we really don’t have much basis for fear about getting this wrong by being too lax. According to research from the Congressional Budget Office, the terms of the trade-off between unemployment and inflation have flattened. This research indicates that even if the unemployment rate was a full percentage point below the NAIRU for a full year, the inflation rate would only rise by 0.3 percentage points.
The NAIRU or non-accelerating inflation rate of unemployment, is supposed to be the lowest unemployment rate we can hit without having the inflation rate start to rise. We don’t know exactly where it is, but most economists put it between 5.2 percent and 5.5 percent unemployment. (I think we can go far lower.) But the point is that if the “true” number is 5.5 percent, and we allowed the unemployment rate to fall to 4.5 percent for a full year, the inflation rate would only be 0.3 percentage points higher than at the end of the year than the beginning. In the current environment, that would mean going from a 1.6 percent core inflation rate to a 1.9 percent core inflation rate.
That doesn’t sound like a really bad story. For this reason, it’s hard to see why anyone should be talking about raising interest rates and deliberately slowing the economy right now.
Note: Link fixed.
Robert Samuelson used his column on Monday to debate the need for the Fed to clamp down on wage growth and came down on the right side: hurry up and wait. This is good to see, but there are a few more data points that make the case even more strongly.
First, the quit rate — the share of unemployment due to people voluntarily quitting their jobs — is still at levels that we would expect in a recession. This is important because it is a relatively direct measure of workers’ confidence in their labor market prospects. If they are unhappy at their job, but they don’t feel they have much opportunity to find a better one, they will be reluctant to quit unless they have a new job lined up.
Percentage of Unemployment Due to Job Leavers
Source: Bureau of Labor Statistics.
The second noteworthy point is the high number of people who report working part-time involuntarily. We can debate the reasons that prime age workers might have dropped out of the labor force, but there is no plausible case that people who work part-time jobs and say they want full-time employment, don’t actually want full-time employment. This number is still up by more than 2 million (@ 50 percent) from pre-recession levels, suggesting a large amount of labor market slack.
The last point is that we really don’t have much basis for fear about getting this wrong by being too lax. According to research from the Congressional Budget Office, the terms of the trade-off between unemployment and inflation have flattened. This research indicates that even if the unemployment rate was a full percentage point below the NAIRU for a full year, the inflation rate would only rise by 0.3 percentage points.
The NAIRU or non-accelerating inflation rate of unemployment, is supposed to be the lowest unemployment rate we can hit without having the inflation rate start to rise. We don’t know exactly where it is, but most economists put it between 5.2 percent and 5.5 percent unemployment. (I think we can go far lower.) But the point is that if the “true” number is 5.5 percent, and we allowed the unemployment rate to fall to 4.5 percent for a full year, the inflation rate would only be 0.3 percentage points higher than at the end of the year than the beginning. In the current environment, that would mean going from a 1.6 percent core inflation rate to a 1.9 percent core inflation rate.
That doesn’t sound like a really bad story. For this reason, it’s hard to see why anyone should be talking about raising interest rates and deliberately slowing the economy right now.
Note: Link fixed.
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The NYT ran an article headlined, “China’s Economy Expands at Slowest Rate in Quarter Century.” People who read the piece discovered that China’s growth rate for 2014 was estimated at 7.4 percent, which is more than three times the growth rate projected for the United States. More strikingly, this is not much of a slowdown from the last two years.
The I.M.F. reports growth in both of these years was 7.7 percent. Measured as a share of growth, a drop from 7.7 percent to 7.4 percent in China would be equivalent to a drop from 2.0 percent to 1.92 percent in the United States. It’s not clear that this sort of slowdown would draw headlines.
There are questions about the accuracy of China’s growth data, but this article refers only to the reported numbers. These do not provide much a basis for talk of a major slowing of China’s economy.
The NYT ran an article headlined, “China’s Economy Expands at Slowest Rate in Quarter Century.” People who read the piece discovered that China’s growth rate for 2014 was estimated at 7.4 percent, which is more than three times the growth rate projected for the United States. More strikingly, this is not much of a slowdown from the last two years.
The I.M.F. reports growth in both of these years was 7.7 percent. Measured as a share of growth, a drop from 7.7 percent to 7.4 percent in China would be equivalent to a drop from 2.0 percent to 1.92 percent in the United States. It’s not clear that this sort of slowdown would draw headlines.
There are questions about the accuracy of China’s growth data, but this article refers only to the reported numbers. These do not provide much a basis for talk of a major slowing of China’s economy.
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Usually when a country takes steps to “defend” its currency, the problem is that the value of its currency is falling in world currency markets. This is most often due to higher inflation in the country in question, although the situation can be worsened by speculative attacks. Raising interest rates is a standard form of defense, since it makes it more desirable to hold assets denominated in that currency.
Against this normal pattern, the NYT told readers that Denmark was “defending” its currency by cutting interest rates. Apparently the problem is that the krone, Denmark’s currency, was rising against the euro. The krone has been pegged against the euro since its inception. The recent upswing in its value threatened to push the krone above its designated range.
So in this case, the “defense” is intended to reduce the value of the currency, not to raise it.
Usually when a country takes steps to “defend” its currency, the problem is that the value of its currency is falling in world currency markets. This is most often due to higher inflation in the country in question, although the situation can be worsened by speculative attacks. Raising interest rates is a standard form of defense, since it makes it more desirable to hold assets denominated in that currency.
Against this normal pattern, the NYT told readers that Denmark was “defending” its currency by cutting interest rates. Apparently the problem is that the krone, Denmark’s currency, was rising against the euro. The krone has been pegged against the euro since its inception. The recent upswing in its value threatened to push the krone above its designated range.
So in this case, the “defense” is intended to reduce the value of the currency, not to raise it.
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Paul Krugman is still upset over the decision by Switzerland’s central bank to end its peg to the euro and allow the value of the Swiss franc to rise. Since some of us non-hyper-inflation worriers don’t share his anger, perhaps it worth explaining the difference in views.
Krugman sees the peg as a sort of quantitative easing. He argues it was working (Switzerland’s economy has largely recovered), so there was no reason to abandon it. He sees the basis for abandonment as a needless fear over inflation and possibly a concern about central bank losses. (The Swiss central bank is partly private. Sound familiar?)
Krugman may well be right about the reasons that Switzerland’s central bank abandoned its peg, but that doesn’t mean that it was wrong to do so.
Switzerland’s peg was designed to promote its growth at the expense of its neighbors. The under-valued currency boosts the economy by making Swiss exports cheaper relative to the goods and services of its trading partners and making imports into Switzerland more expensive. In this story, Switzerland’s growth is a direct subtraction from the growth of its trading partners.
This is not a big deal with a relatively small country like Switzerland, but imagine that Germany left the euro (hold the applause) and adopted the same policy of deliberately under-valuing the new mark against the euro. Germany would then run large trade surpluses and the other euro zone countries would run large deficits, draining away demand. Should we applaud this policy as a form of quantitative easing that needs to be supported?
Krugman’s argument rests largely on the idea that we need to promote central bank credibility. I’m a bit more skeptical on this one. Central bank credibility is a two-edged sword. One of the main reasons that we are not supposed to pursue QE-type policies is the risk of inflation, which could undermine central bank credibility.
I would agree with Krugman that the risk of any serious outburst of inflation in the current economic situation is near zero, but of course it is not zero. And the risk of inflation in an economy with less demand and higher unemployment is lower than the risk in an economy with more demand and lower unemployment. This means that we do face more of a risk of inflation and damaging central bank credibility on keeping inflation low with QE than without.
For me, this is a no-brainer. How many parents of children should be unemployed so that everyone knows the Fed won’t let the inflation rate get above 2.0? The answer would be very few, but if central bank credibility is some great good of enormous value, then the QE-foes may have a point.
I would keep credibility on the back burner here. Switzerland has a budget surplus and extremely low government debt. It should be running budget deficits to boost its economy and those of its neighbors. There is no reason we should be applauding its efforts to sustain demand in its economy at the expense of its neighbors.
Paul Krugman is still upset over the decision by Switzerland’s central bank to end its peg to the euro and allow the value of the Swiss franc to rise. Since some of us non-hyper-inflation worriers don’t share his anger, perhaps it worth explaining the difference in views.
Krugman sees the peg as a sort of quantitative easing. He argues it was working (Switzerland’s economy has largely recovered), so there was no reason to abandon it. He sees the basis for abandonment as a needless fear over inflation and possibly a concern about central bank losses. (The Swiss central bank is partly private. Sound familiar?)
Krugman may well be right about the reasons that Switzerland’s central bank abandoned its peg, but that doesn’t mean that it was wrong to do so.
Switzerland’s peg was designed to promote its growth at the expense of its neighbors. The under-valued currency boosts the economy by making Swiss exports cheaper relative to the goods and services of its trading partners and making imports into Switzerland more expensive. In this story, Switzerland’s growth is a direct subtraction from the growth of its trading partners.
This is not a big deal with a relatively small country like Switzerland, but imagine that Germany left the euro (hold the applause) and adopted the same policy of deliberately under-valuing the new mark against the euro. Germany would then run large trade surpluses and the other euro zone countries would run large deficits, draining away demand. Should we applaud this policy as a form of quantitative easing that needs to be supported?
Krugman’s argument rests largely on the idea that we need to promote central bank credibility. I’m a bit more skeptical on this one. Central bank credibility is a two-edged sword. One of the main reasons that we are not supposed to pursue QE-type policies is the risk of inflation, which could undermine central bank credibility.
I would agree with Krugman that the risk of any serious outburst of inflation in the current economic situation is near zero, but of course it is not zero. And the risk of inflation in an economy with less demand and higher unemployment is lower than the risk in an economy with more demand and lower unemployment. This means that we do face more of a risk of inflation and damaging central bank credibility on keeping inflation low with QE than without.
For me, this is a no-brainer. How many parents of children should be unemployed so that everyone knows the Fed won’t let the inflation rate get above 2.0? The answer would be very few, but if central bank credibility is some great good of enormous value, then the QE-foes may have a point.
I would keep credibility on the back burner here. Switzerland has a budget surplus and extremely low government debt. It should be running budget deficits to boost its economy and those of its neighbors. There is no reason we should be applauding its efforts to sustain demand in its economy at the expense of its neighbors.
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A Washington Post article on President Obama’s new willingness to push an economic agenda contrasted U.S. economic performance with “the anemic economies of Europe and Japan.” It’s not clear on what basis Japan’s economy is supposed to be anemic compared with the U.S.
Its unemployment rate stood at 3.5 percent in November, the most recent month for which data are available. Its employment rate has risen by two full percentage points since the end of 2012 when its new government shifted towards Keynesian expansionary policies. By comparison, the employment rate has risen by just 0.8 percentage points over the same period in the United States (it did rise by another 0.3 percentage points in the fourth quarter). The 1.2 percentage point difference for the period for which we have data from both countries would correspond to another 3 million people being employed in the United States.
It is also worth noting that the employment rate in Japan is 1.7 percentage points above its pre-recession level. In the United States it is more than 3.0 percentage points below its pre-recession level.
A Washington Post article on President Obama’s new willingness to push an economic agenda contrasted U.S. economic performance with “the anemic economies of Europe and Japan.” It’s not clear on what basis Japan’s economy is supposed to be anemic compared with the U.S.
Its unemployment rate stood at 3.5 percent in November, the most recent month for which data are available. Its employment rate has risen by two full percentage points since the end of 2012 when its new government shifted towards Keynesian expansionary policies. By comparison, the employment rate has risen by just 0.8 percentage points over the same period in the United States (it did rise by another 0.3 percentage points in the fourth quarter). The 1.2 percentage point difference for the period for which we have data from both countries would correspond to another 3 million people being employed in the United States.
It is also worth noting that the employment rate in Japan is 1.7 percentage points above its pre-recession level. In the United States it is more than 3.0 percentage points below its pre-recession level.
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