Prices and wages section in the division of research statistics. Some context e thats the section thats preparing the forecast of inflation and wages fomc. Rices for the weve been long time colleagues and i want to assure any lawyers none of our that conversations should be nterpreted to constitute my making a request of the federal fomc. Ve system or the i think were clear. Our second panelist is jared senior fellow at the center on budget and policy priorities and hes been very years thinking about the labor market, nequality and macropolicy from his position both in the Obama Administration and in various think tanks here in d. C. And you read more about his thoughts on the economy. Let me turn the presentation over to them. Thank you very much. Steph. Here. A pleasure to be. Thank you chlt of making e spirit disclaimers i should say the they dontssed here, necessarily reflect the views of colleagues of the board or he Research Staff at the Federal Reserve system as a whole. Ill start my presentation by some of the points in my opening remarks. First chart is a chart of he changes in inflation as measured by the price index since the 1970s. Ou can see that inflation dynamics have changed dramatically over the past half a century. The past 25 years, inflation has been considerably the preceding 25 years. Over the past movedion inflation has in a relatively narrow range espite big swings in oil and other commodity prices. He Great Recession and Monetary Policy actions. I think we can say over the past decades, core inflation can be well characterized i am empirically. In turn can on reflect changes in supply or temporary influences. And economists often view the of the trend over the past two decades, or the outcomes themselves that have been engineered by policy. Y however, there is not that much support that view. Now turning i just want to of a little bit background about the curve, in he late 1950s, phillips documented a negative elationship between wage crowd and the Unemployment Rate and economists ter confirmed this relationship. Ow, labor costs are about 50 of the firms production cost. So intuitively they should matter a lot. In the mid 60s they pointed to a negative relationship between the Unemployment Rate we nowce inflation which refer, we refer to this negative as the ship these days phillips curve. This curve, this relationship a lot over the past half century, so what ive here, plot line is still called inflation in the u. S. And differenceine is the etween the Unemployment Rate and the rate of unemployment which in this case is the office al budget what it says. When they talk about the changed i ps having want to point out the recessions. In the earlynt out 1990s, in the early 1980s, when Unemployment Rate moved up, above the rate of unemployment means the green line went the zero line, inflation declined markedly, and, in each of the recessions, it has the on inflation. Ect if you look to the latest dont see suchou a decline in the inflation. Unemployment e rate went up. So, inflation didnt come as much as it did in previous we weres and the models using back then could not explain the behavior of this inflation. So the failure of the models to required a lot of research and a lot of papers and ill just mention the names of a few of those papers. Was t gordon, 2013 paper the phillips curve is alive and 2018 but then murphy in wrote about the death of the curve. Ps in 2018, the phillips curve and more recently, is the hillips curve back or is it just hibernating . There is a fairly broad relationship the between unemployment and i lation has changed, but dont think economists agree on become the inflation has completely disconnected. So today i will argue, yes, the curve relationship is not the same as 20 years ago but disappeared. Pletely and i think that the phillips a ve framework is still useful framework to think about when discussing inflation. In the rest of my presentation, ll provide an update of research that ive done with one of my colleagues who is also that hes allowed us to of at the responses different economic variables over time. Motto is a regression allowed ich they have to change over time which allows responses, andhe n the left, weve plotted the responses of labor costs growth, nd on the right, its the responses of core inflation and just to mention, measure ideo we have a f inflation which is core market base for the u. S. , a easure of prices, the nemployment rate gap, and, wages, labor costs in this case. Unit labor costs in this case. You will see in the left panel, the response to but not t has changed, that much. At the same time, the response of core inflation to has changed a lot, and this is the same thing you observe in the standard phillips curve models. Even will also say is line, which is the latest response to is small, its not nonexistent. Its still there. If you look at the recent ition of movements in inflation so that inflation is plotted as the a baseline there is forecast from this model, which and the baseline model shows the structure of at ks in this case, we look the effect of the unemployment see that and you can the unemployment or economy is still an important factor for frequency movements in inflation. So since this is a discussion of and inflation i ould like to answer a question that we very often get, is on the adequate easure of slack are good questions but going back, the fact that we dont see a phillips curb he but we see a flattening of the rice phillips curve means that it will be very hard to explain what we see on the right but left, its on the coming entirely from the labor market development, and there are other things going thats why were not the ones presenting. Its against the background of change, the long term changes in inflation, by it on the first slide its become increasingly to discern a single factor. That doesnt mean its not important, its just difficult. And it can be obscured by other that affect inflation. Jared, i i pass on to would like to, again, reiterate two things. Decades last couple of weve seen some major changes. One is the change in the trend more stable. Much the second is that we have a phillips curve. The thing is we dont perfectly nderstand the reasons behind those changes. E have hypotheses and a lot of research has been done, but i dont think we have a very good of whats driving it, which leads me to the final policy hat from a perspective, its worrisome how this trend will continue in the future . Will take us to move it can we explore this in a productive way. Thank you. [applause]. Thanks s very much and for inviting me. They come up with the most gets sting topics, and present Company Excluded the most interesting people to talk about them. A real, a great opportunity. Im going to buzz through a points that have just been relentlessly made today so to nt feel like i have spend my precious time on them first, we others have pc is than the price pc and i think its what im going to talk about, and in a somewhat that hasnt been raised although janet yellen her talk and thats the opportunity that the low and stable inflation in the phillips curve achieving much tighter labor markets persistently and the benefits are yield to people who frequently left behind in slack periods, and so thats going to discussion to my you today. The opportunity that these ynamics present to us in helping some folks who really help. Iate the the labor market actually, as here to try to talk about the role of the labor explains an tually ncreasing share of the various prices, more than i thought. We still have that doesnt opportunity that i mentioned, and these gains, by i wont surprise this crowd, gains im going to talk that are show you, engendered by this opportunity, they are not just about equalizing wage pressure. I tend to in my presentations about this because ive been work on this area and the enefits of full employment for a long time,e tend to emphasize ow the elasticities are larger for lower paid workers and thats really important in that sense, full employment is what im going to talk about today are labor pportunities for people left behind on the labor supply side. Story about the curve being lips more steep on the lefthand ide, quite nonlineal, the unemployment gap plotted against a matchup of five different wage theories its a very familiar line on the righthand side, its much more of a random story. The one thing i wanted to raise, raiseo things i wanted to about this today is the first, my h is consistent with theme, less wage price pass through which is the implication of this and something weve from this rd about wage not zero but less pass through further underscores the opportunity of a flat run for longerto unemployment and tap the benefits that im going to show you in a minute. Also think that this slide poses a bit of a challenge to that the want to argue regional phillips curve is perhaps a more important one or valid one or certainly a better identified one given the variance and the observations. More variance in unemployment if you get below well, we tional level, have a wage phillips curb thats ecently identified and its tapping the same national variance in the Unemployment Rate. So, you know, i guess im very interested in the fact that the curves tend tops be steeper, ones at the msa, at not tate level, but im sure that seals the deal as to, mystery. Solving the because the National Wage phillips curve remains alive and well. So how much variance does the labor market this explain anyway . This is a very simple exercise i think is hopefully somewhat revealing in the sense regress the ust change in core inflation, on Inflation Expectations, and then residual, so you net out the part of the variance thats explained by expectations, and then you do a olling regression on the residual using, the gap, so far weve only used cbos, a mouse click away, there is that. Start rate, and then you peeling off the r squares from how this slide shows you much of the variance in inflation does the labor market, or at least the unemployment gap explain . In recent years, it hasnt explained very much at all, but and this to climb up is very much consistent with her point its not everything but and in fact, ther omething like 12 of the ariance is explained, and 12 of our time today should be spent talking about the labor market. His is the wore of what i wanted to talk about. These dynamics create an opportunity. Flat phillips curve but weve had decades of higher inequalities, long terp real and low n for middle wage workers, lots of people in place left behind and bargaining deficits that are offset by full employment. And so i recently wrote a paper where we concluded that these changing inflation dynamics in tandem with the i just went through should create asymmetry function. Ds reaction elevate the benefits of full employment and diminish the pressures. Flationary now, i say that with recognition of janets point that those gone away. t in fact, the flat phillips curve could be a problem on the other side if youre hit with persistence, inflationary shocks. Miracle, hes id an analyst from goldman sachs, and e makes the same point i only put that in there because hes, you know, im sort of with the left side of there is my and so point. Arguing that the tight labor market poses left risk and effects, asploit the long as Inflation Expectations stay anchored. I think thats really important. And the key to my presentation. Work that was w just released this morning on my blog with keith bentley. Become a paper for a full employment project and this gets to the benefits of full ways that you probably havent seen before. We look at all the different on the lefthand an you basically have employment rate. An annual measure so its a little different than the mployment rate that we look at every month from the bls but what this shows is the but line is the employment rate and its cyclical. These folks are very responsive to the cycle in terms of their abor supply crossing the extensive margin. And the prediction there simply Unemployment Rate, and a dependent variable to predict he line and at some level youre saying one cyclical variable goes into another cyclical variable. Look at 345 you dont see much at all so its particularly a story for low wage workers. The ones who will be ost helped by this opportunity to low inflation bequeaths us. I know there are a lot of numbers there but ill just focus on the circled ones. At the shared working in the bottom quintile, and im looking at 1919because it was such a High Pressure labor market. A lot going on, welfare reform, minimum wage but the all true, results warwick a High Pressure labor market. In fact, if you look at the low income workers, and this includes zeros, okay, this is if you have earnings or if you dont, 50 log w by 50 or because the three multiplykative, half of that increase, 23 over 49 r almost half of that increase is crossing the extensive the job oming into market. Okay . If you look at africanamericans, their annual arnings more than doubled over this High Pressure labor market, and half of the increase was crossing the extensive margin. Was increasing in the share of work, and that shifts in bottom handle, you know, when the economy more economically ulnerable folks catch pneumonia. In the downturn, half of those reversed, fellre 0 , and 3 5ths of that decline was people crossing the way. Sive margin the other so the costs to the slack in the jock market are particularly borne by this group but the benefits are quite pronounced. In our paper we also show the most recent period. The one were in right now, of markets and while the gains arent as dramatic as hey were in the 1990s labor market, they are comparable and they are economically large. Cant and very important to these folks. Now what i have here is just the thanks to t gap and my excellent ra i was able to do slide, and, here are just some headlines, recent headlines. These are headlines over the you know, few months, tight labor market. Disability may not be a barrier. Thought i was done. Open doors for convicts. Americans are increasingly job hopping in tap some wage increases. Thank lusion, i want to the Federal Reserve for recognizing this opportunity, listen to the words of jay powell and others, other former fed officials have said much of the same thing, you will hear him these ly making connections, so i wanted to thank the fed for that, for and i those benefits also want to thank the american eople for their anchored expectations, which are key to all of this. Thank you very much. [applause] okay. Panelists hank our again for those great presentations. I have a lot of questions. Through ly wont get them all today, but one of the things that i am curious about interpreting whats currently going on in the economy, so weve heard other morning assert that while the phillips curve seems out a lot ttened there is still some action in the wave in the phillips curve but when i look at wage growth looks to me that its running at about the pace would you expect given productivity inflation. So that doesnt actually seem to labor estive of a hot market which is how a lot of people are characterizing it and how you of curious interpret that. Is there some attenuation of the curve, is there Something Else going on, if the number lower . On this question, my more full n was because on the long term a nges, but its just been constant question, why isnt the target, why k to arent we at 2 . Remember, the chart i on ed, the movements inflation and how it can explain below the on was baseline forecast during the recession. Turning point was high, its just gone back to zero, so we anything from the slack at this point which is understandable. Ut were still if i have time to show another one, i would have shown not only the structure but also from import prices. Nd that could explain a lot of happens through 15 and 17 and 18. So it doesnt get us all the way there. And the third time i didnt have ime to focus was on this trend too much. And if you go back to the first chart you will see the trend and the baseline forecast from the model is not 2 . 1 s more something closer to 3 4. Even though the trend has been steady. Its at 2 . Thats my few explanations for the last few years. I think there are three explanations to your excellent question because i think youre right. The first is that actually theres been a longer stronger wager at the bottom. This is consistent with my earlier point that its stronger at the bottom the scale. The second point is that its probably maybe the most important is that probably the job market really isnt quite at full employment yet. That may sound somewhat controversial. Heres a huge huge complication ms. The limits. Theres first simple realization is that were probably not at full independent. And the work Bargaining Power has been so severely diminished because its going to take very low unemployment for a long time. Its around 6 00 or 7 00 . So another question i wanted to get at was to try to tease out a little bit more what you think is going on between about wage bath through into prices. Some of our speakers have looked at it. Of a pricee evidence fillups curve. Inflation has been very flat. Core inflation. What are you explanations for why these changes in wages arent translating more into price imflation . Again. Research. Doing what we do at the board, this is a question we very often get. And we struggle to explain why on those ve wages situations. We looked at the past stroke overtime and depending what measure you use, if you lose you use the most comprehension, but you could see a steady decline over the years to the oint where you dont see a price to from wages to costly. Its more stable but not very big. This is not to say that wages dont matter for prices. They should matter. Theyre production costs. But i think we found in the paper that if you are in there similar one to unit labor cost, youll see that they are both very stable. Stable his in this environment, its very hard to identify movement that are translating to prices. What you find is that year to year movements in inflation in Price Inflation can reflect and can reflect import prices or other id yo sin crassies extra. But this has to identify a movement from independent. The movement and prices. I dont have a ton to say about this but two points. One is i really do find this relatively new literature on the impact of firm concentration within firm industries to be relevant to this conversation, to this question. You see this in retail. You see it in health care, in technology. Dominant firms. You know, i sort of grew up in an economics when mo top in plistic firms took place. Were not seeing it in the price side. Were seeing it on the labor cross idaho. A firm concentration appears be correlated with share. Screw workers instead of on the price side. And you know, i obviously think thats problematic and the tight labor market is starting to push back on that even though labor share is uncharacteristically low, and i walk around thinking this is an important source. I always tell this to my friends on the fed who will listen to me. That the important caveat that the that there is, you know, that theres room for noninflation nail its through neighbor catching up. Thats not a slam dunk because firms may try to pass it through on prices. We havent seen a lot of that as your question implies. So i guess related to this, weve heard some talk this morning about whether we should be focusing on alternative measures of slack. The Unemployment Rate was never a comprehensive measure. It was an efficient statistic for flat. And whether we need to be looking at a more comprehension level. You might if i start with that . I think that is a fine point. But its overblown because i recently did a blog on this where i correlated the Unemployment Rate with all the other measures i could think of. And the correlations are really, really high. Theyre above. 9. And my friend john roberts is a the audience an excellent fed economists and has done some work on sort of throwing some of these flag variables see and as i believe john will correct me if im misrepresenting this. The Unemployment Rate kind of dominates. So yes, sure other members. But i wouldnt spent a ton of time on that. And now to reiterate the point from my presentation. I think its a very valid question and certainly one we should be looking at. But the fact that we dont have the flattening in the wage miss. Theres Something Else going on in the price. That does not come from argaining necessarily Bargaining Power or the right measure of leg. Last question before i turn it over to the audience. Im going to pick on you a little bit. Which is derek came out very strongly saying not much inflation. We have an opportunity here. You expressed some concerns at the end of your talk. I was sourt of curious like you think question have the space that jared has. Youre not speaking against anyone in the Federal Reserve systems. Or do you think it dominates . I will say how i spend my day. We in the morning, i i ve to do something in the so i think i am worried that that that for example, if you look at the michigan survey, and some will tell you thats because people were just drinking a cup. It might be just a reaction to per sintly doing patients. And it would be great to pew those up. But only by three things. [laughter] and if we can do that, thats great. How confident are we that we can run the economy so again, im on both ends worried. I dont want to create the misimpression that im operating from a nothing to worry about kind of perspective on this threat of future inflationary pressures. I mean, i guess the thing i take from the conference so far and all of the reading ive done so far in recent years on this is i dont think question have a great i think ive heard i just dont think we have a great understanding of whats driving inflation dynamics. And that means for now, based on the impeer cal evidence that i have prevented we can tap the benefits that i was stressing as being so critically important given the history of whats be fallen middle and low income folks. But when you dont know what you dont know can help you but also hurt you. Before we go get the questions. We have three labor mark. Dont think you should expect answers. I think it was a brookings paper. And one of the things you talked about was something i take very important that janet referenced in her early comments. She its actually well, its the reversal of a bad disease. And what and what janet was referring to was the possibility that my slide baseball tonighted all these people. Historically theres been a problem of last hired first fired and people geet elizabeth into the job. They dont stay in the job market. And the idea is that perhaps tight labor markets can actually improve the supply side of the economy by pulling people i really want to hear what you have to say about that possible. So its true. So in this recent paper that i worked on. We did find a little bit of evidence that particularly along the participation margin and the martian that they do pull people in. Our consistent was consistent with some of the micro we use time series data which i think have their limitations for looking at this limitation. It has down some shortterm effect that when people are posing to the labor market and become employed that they remain employed for a bit longer. There are some lasting effect. And this question is very crucial because if there were significant history just the fact by running the economy hot, we could boost labor supply. That would reduce the tradeoff that the fed would face. So the one thing ive been hinking about is why once someone comes in. They gain experience. They create network that they should have a more long lasting tie to the labor market. And i think par of the issue is precisely what you side that the economy largely operates as, you know, last houred first fired and people tend to be hired into ery cyclical industries. And also then we dont run the economy hot for very lodge. The experience is below the natural rate. I think if you looked at them other experiences in history that arent dependent on the Business Cycle you actually see better evidence of that. So thinking in particular about womens entry into the labor force after the second world war. That went on for a number of ar, and it significantly boosted womens labor supply. If you read it. It laid the groundwork. Bye. Changing the way family operated by changing the structure of work an institution. And so, you know, i think there its psycho e frequency. In recent years that you would see those effects. I think one of the problems is that we all talk about from the perspective of micro economics. Which is fine. Thats certainly a baseline. Were going to have to do something to help people who face large labor market barriers when the micro economy helped. To help keep them in the job market. And things of that nature. Ok. So let me see if we have time for a few questions from the audience. Danny, think i see your hand. I want to answer your question about what variables and wage equations youre look at ate. Turns it that in the u. K. And the u. S. And everyone else. Theres one variable that works and nothing else does. The Unemployment Rate didnt works. Its the thing that drives you six. Its part time for economic reasons over employment. And the reason why its really quite variable is because it hasnt been reverted in any ountry in the world. The Unemployment Rate doesnt ent sorry. It doesnt. The under employment rate does. Thats the answer to your question. I have a new one coming in. The only variable in the u. K. In the u. S. And a so. I dont buy your comment that the Unemployment Rate sympathetic. Im a little embarrassed. We published with Great Respect for you and your work and i think youre slargely right. I do get commer when they glom on to one variable that they really love. They often doesnt end well. Do you a i want the answer your questions and why the wages are steeper to the exsent theyre successful and im coor late with everything including slack. Now, you might wonder, why are e receiving. Maybe theres comfortable expansion. But the fed is now tarkting wage inflation. And so that relation is free to some extent. So the low income folks they cant get unions to help them. So they go of the government. And the government becomes populist enough to contemplate a minimum wage increase. The low information people spent a great portion of their information on snessity. So how high can we put the minimum wage without jeopardizing the security, the bottom fifth. Yeah, i will speak to that, mine, but first let me point out. One of the reasons i really enjoy hammering on this ben fipts of full employment is that its pretty nonpartisan. And its not government, you no doing stuff. But its its really, you know, markets working for low income people. You know, i guess from the evidence ive seen that you uld go to 15 on a minimum wage. And so youd want to phase it in slowly. I think the research would support that idea. Ok. Im going to have to end the panel. Thank you very much to our panelists. [applause] cre credit [captioning performed by national captioning institute] [captions Copyright National able satellite corp. 2019] today at 6 00 p. M. Eastern, live coverage of Hillary Clinton and her daughter chelsea talking about their new book. The book of gutsy women. Watch our live coverage from the politics and pros books store in washington, d. C. Oday at 6 00 p. M. Eastern. On cspan2. The Supreme Court justices return for the new term next week. With the Court Hearing cases on employment based on