Still No Sign Of Labor Market Overheating

by: Scott Sumner

I’ve always argued that average hourly nominal wages are the single best indicator of demand conditions in the economy. Of course I favor targeting NGDP, not average hourly wages, partly for political reasons and partly because hourly wages are difficult to measure. Still, it’s worth looking at wages for signs that the economy’s problem is no longer demand-side. And the data are unambiguous:

Wages are up 2.0% over the past 12 months.

Wages rose at a 1.9% annual rate over the past 6 months.

Wages rose at a 1.2% annual rate over the past 3 months.

Yep, money is still too tight. The economy is gradually healing, but only because the slowing wage growth is adjusting AS to the decline in AD. And by the way, NGDP growth is still slowing a little bit, even from the low levels of 2009-12.

The stock market liked today’s jobs number, partly because investors would like to see continued growth and continued QE. To some extent those wishes are in conflict - the Fed will tighten policy further if economic growth is too strong. But the Fed has tied its policy to the unemployment rate (i.e. the Evan’s Rule), whereas the monthly payroll jobs number is a better measure of economic growth. So when the jobs number is good and the unemployment number is bad (like today) the markets will tend to rise, seeing both economic growth and the prospect of delay in further Fed tightening. I say “further Fed tightening” because money is still very tight.

In other news, job growth this year is running 189,200/month, versus 182,750/month last year. Which economist said late last year that Fed initiatives such as QE and the Evans Rule would roughly negate the effects of fiscal austerity? And which school of economists got it wrong, suggesting fiscal austerity would sharply slow growth? And which school of economists got it wrong, suggesting “easy money” would lead to higher inflation? Just asking.

The financial press speculates that the Fed may begin tightening in September because nominal growth would be too strong if it didn’t tighten. And also that growth is weaker than the Fed likes because of the sequester. Go figure.