Real Phillips Curve Update

Kevin A. Erdmann profile picture
Kevin A. Erdmann
196 Followers

Summary

  • If we treat the Phillips Curve as nominal, then the inclination is to reduce growth to prevent inflation, and unemployment will be invariably driven higher in a misguided attempt at moderation.
  • If we treat the Phillips Curve as real, then the inclination is to celebrate low unemployment unconditionally, and allow the benefits of highly functional markets to continue to accrue.
  • There is a relatively stationary long-term relationship between real wage growth (I prefer using CPI less food, energy, and shelter as the deflator) and the unemployment rate.

Here are a couple of charts comparing real wage growth and unemployment. My contention is that the Phillips Curve is real, not inflationary. It only appears to be inflationary when monetary policy is procyclical. When unemployment is low, real wage growth is higher, largely because of better matching, fewer frictions in labor markets and higher labor productivity.

If we treat the Phillips Curve as nominal, then the inclination is to reduce growth to prevent inflation, and unemployment will be invariably driven higher in a misguided attempt at moderation.

If we treat the Phillips Curve as real, then the inclination is to celebrate low unemployment unconditionally, and allow the benefits of highly functional markets to continue to accrue.

There is a relatively stationary long-term relationship between real wage growth (I prefer using CPI less food, energy, and shelter as the deflator) and the unemployment rate.

We shouldn't be afraid of real wage growth. And, in either case, wage growth is humming along pretty close to the long-term trend. Celebrate that unconditionally.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

Kevin A. Erdmann profile picture
196 Followers
As a private investor, I have concentrated on deep value and turnaround microcaps, where illiquid trading markets and reputational risks allow mispricing to be occasionally extreme. Over the past few years, I have developed a radical new macro-level view of the economy. I have found that the housing bubble was not caused by reckless lending or over-investment in housing. Rather, it was caused by a shortage of housing in several important urban markets. The subsequent bust and financial crisis were not inevitable collapses of a demand bubble, but were avoidable and self-imposed consequences of a moral panic about building and borrowing. The key factors providing insights into financial markets going forward are related to the shortage of housing and the disastrous public policy responses to it. This has led to high rent inflation, perpetually tight monetary policy, a divergence of yields between US housing and bond markets, very low rates of new construction, and labor immobility/stagnation.Two books are in the works on the topic.  Here is the first:https://rowman.com/ISBN/9781538122143/Shut-Out-How-a-Housing-Shortage-Caused-the-Great-Recession-and-Crippled-Our-EconomyI am currently a Visiting Fellow at the Mercatus Center at George Mason University.
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