Sunday, May 08, 2011

No Wage-Price Spiral if Wages Refuse to Spiral

On his blog, Greg Mankiw says that he agrees with Paul Krugman that volatile commodity prices are not necessarily inflationary and he cites the abstract of one of his research papers (with R. Reis) "What Measure of Inflation Should a Central Bank Target?(published link):
This paper assumes that a central bank commits itself to maintaining an inflation target and then asks what measure of the inflation rate the central bank should use if it wants to maximize economic stability. The paper first formalizes this problem and examines its microeconomic foundations. It then shows how the weight of a sector in the stability price index depends on the sector’s characteristics, including size, cyclical sensitivity, sluggishness of price adjustment, and magnitude of sectoral shocks. When a numerical illustration of the problem is calibrated to U.S. data, one tentative conclusion is that a central bank that wants to achieve maximum stability of economic activity should use a price index that gives substantial weight to the level of nominal wages.
The graph above shows that nominal wage increases have been falling since 2007, and are currently running about 2% annually, suggesting that there are no significant inflationary pressures right now for nominal wages.  As Paul Krugman pointed on a recent  post, "You can’t have a wage-price spiral if wages refuse to spiral; and all indications are that wages are being held down by high unemployment." 


At 5/09/2011 9:32 AM, Blogger morganovich said...

which means that if you get price inflation, you'll see significant reductions in real living standards.

this is pretty much proof that the wildly loose money of the last decade is a failed and damaging policy.

where is the flow through to wages of this massive monetary expansion? it's failure to materialize pretty much proves that you cannot print your way to prosperity.

you get price inflation, and wages do not keep up.

the last GDP figures showed prices up roughly 2X what nominal wages are.

this is only going to get worse.

no jobs are being created and workforce participation is at 25 year lows while wages stagnate and prices spike. (BPP running at over 7% annualized since jan 1/11)

it's time to get off this terrible crackhead addiction to loose money and bubbles. you cannot build an economy that way.

At 5/09/2011 10:14 AM, Blogger Ironman said...

Do the components of a wage-price spiral have to be contained inside a nation?

For example, many products are priced in global markets, which are in turn driven by economic activity elsewhere in the world (let's say China to keep it simple.) Suppose a very large portion of that activity is indeed driving up wages outside of the U.S., which isn't seeing that part of the wage-price spiral within its borders, while also driving up prices everywhere, which the U.S. has in fact been seeing.

What kind of ride are we really on then?

At 5/09/2011 11:27 AM, Blogger Benjamin Cole said...

Dr. Perry shows why he is one of the best-read econo-bloggers out there. He goes beyond (sometimes) the usual, right-wing blah-blah.

The birthers and "Osama bin Laden is still alive" crowd have taken over the right-wing, and now weave conspiracy theories that inflation is runaway and that the bearded, academic Bernanke and the Fed want to destroy capitalism through hyper-inflation.

In the non-faith-based world, inflation is deader than Osama bin Laden. Wages are even deader.

House prices are still falling, commercial properties are still falling, and the DJIA is about where it was in 1999. Even commodities have broke.

We have massive hyper-inflation in the 1 percent to 2 percent range. Spread the fear. Spread the misinformation!

The inflation sky is falling, the inflation sky is falling. Cluck, cluck, cluck and squabble!

At 5/09/2011 12:09 PM, Blogger Mr. Econotarian said...

I'd prefer an examination of whether there is a "total compensation" spiral, as most compensation expansion recently has been outside of wages, but instead in health benefits (which are rising faster than the CPI).

At 5/09/2011 1:28 PM, Blogger Benjamin Cole said...

Mr. Econotrarian:

Unit labor costs, which include all costs, have been falling for two years straight. BLS stats.

Small increases in total costs have been more than offset by booming productivity.

It will be interesting to see how we get to hyperinflation with falling labor costs and M2 increasing by 6 percent a year.

You know, like those diets where you lose 16 pounds a week and eat everything you want?

At 5/09/2011 2:16 PM, Blogger morganovich said...


will you ever tire of making this same, stupid, circular argument about unit labor costs and inflation?

you cannot calculate unit labor costs without knowing inflation.

therefore, you cannot use unit labor costs as a sign of low inflation as they are a dependent variable.

if you understate inflation, you overstate productivity, which in turn, understates unit labor costs.

this has been explained to you several times.

is there any way to get this through your head?

At 5/09/2011 2:19 PM, Blogger morganovich said...


that's a very interesting observation.

as the emerging asian middle class gets wealthier, they will consume a great deal more fuel and meat etc. those are all global commodities, so it does stand to reason that Asian wage increases could drive prices up here.

i had not thought of it in precisely that way. i think you are correct that their wages will drive our prices.

At 5/09/2011 2:29 PM, Blogger morganovich said...


speaking of disinformation, did you not notice inflation at 3.8% in the q1 gdp figures? t

so much for your 1-2% claim. (though given your apparent mathematical ability, it hardly surprises me that you can't tell 1 from 3.8.)

you need to get your facts straight. inflation is here and accelerating. the last monthly CPI number was 0.49. that annualizes to 6% inflation if it keeps up.

your commodities claim is equally vacuous. they sold off hard due to margin issues in the futures market. they will snap right back once that quick disruption is over. it's only been a 3 day correction benji. it's a bti early to declare they have "rolled over". even post correction, the CI is up 3.7% ytd, which is double digits when you annualize it.

your mistatements seem to have no bounds.

the next 50 points on the CI are up, not down.

At 5/09/2011 3:40 PM, Blogger Michael Hoff said...

"The birthers and "Osama bin Laden is still alive" crowd have taken over the right-wing."

They have?!? My militia mustn't have received that memo.

At 5/09/2011 3:49 PM, Blogger juandos said...

"They have?!? My militia mustn't have received that memo"...

An excellent response Michael Hoff to a typical goofy (stupid?) pseudo benny comment...


At 5/09/2011 4:00 PM, Blogger Benjamin Cole said...

Michael Hoff-

Did you hear who murdered Vincent Foster?

At 5/09/2011 4:08 PM, Blogger juandos said...

Q: Why did Bubba and Hillary only have one kid?

A: Vince Foster is dead.
Knock Knock
Who's there?
Foster who?
Foster than a speeding bullet
The Foster affair fully explained

At 5/10/2011 3:34 AM, Anonymous Anonymous said...

Looking at the graph, there have been 2% spikes in inflation in the course of a year relatively commonly. I think that's the fear of the inflation hawks, that there will be a sudden shift in sentiment that can't be controlled. However, one issue that's not often appreciated is that most reserves these days are electronic, which means the Bernank can pull them out quickly. I doubt this was the case back in the 70's. If you actually print cash to hand to the banks for them to keep in reserve, tough to control how they spend it afterwards, but that's not what the Fed does with electronic reserves these days.

At 5/10/2011 8:33 AM, Blogger VangelV said...

Sorry Mark but the parrot is dead. No amount of pretending will change that fact. Inflation is a problem and is destroying the purchasing power of anyone dumb enough to hold savings in a bank or treasury account.


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