So, im very excited to introduce our next panel. Its all about the labor market. We have two great panelists. The first we will hear from kostya, a principal economist in prices and wages section in the division of research and statistics at the Federal Reserve board. To provide context, thats the section responsible for preparing the forecast of inflation and prices for the fomc. I have to admit that katia and i were long time colleagues. I want to assure any lawyers here none of our conversation should constitute my making a request of katia, the Federal Reserve system or fomc. Our second panelist is jared bernstein, a senior panel at the budget on policy and been active many years in the labor market and inequality and policy both in the Obama Administration and in various think tanks in d. C. And you can read more about his thoughts on the economy. I will turn the presentation over. Thank you very much, stephanie. Its a pleasure to be here. How do i thank you. Okay. So, in the spirit of making disclaimers, i should also make the disclaimer that the views expressed here and in the following discussion are my own. They dont necessarily reflect the views of my colleagues at the Federal Reserve board or Research Staff at the Federal Reserve system as a whole. With that said, i will start my presentation by illustrating some of the points that our former fed chair, janet yellin, made in her opening remarks. The fist chart is a chart of the four quarter changes in u. S. Core inflation, as measured by the pc price index since the 1970s. You can see that inflation dynamics have changed dramatically over the past half a century. Over the past 25 years, inflation has been considerably lower than over the preceding 25 years. Furthermore, over the past, it indicates calling inflation most relatively narrow range despite big swings in oil and other commodity prices, the Great Recession and unprecedented Monetary Policy actions. So, i think we can say that over the past indicates core inflation can be well characterized empirically along the stable long term trend. This fluctuations in turn can reflect changes in slack, supply shocks or other temporary influences. Economists often view the stability of the trend over the past to indicate as a resulting from better anchor Inflation Expectations or the inflation outcomes themselves have been engineered by Monetary Policy, however, theres not that much evidence to support that. Now, turning to slack i just want to give a little bit of a background. In the late 1950s we learned philips documented a negative relationship between wage growth and the Unemployment Rate. Soon thereafter economies confirmed this relationship for a lot of developed economies. Now, labor costs are about 60 of the firms production cost. Intuitively they should matter a lot for the pricing of firms. Indeed in the mid 60s they pointed to a negative relationship between the Unemployment Rate and Price Inflation, which we refer to this negative relationship these days as the philips curve. This curve, this relationship has also changed a lot over the past half a century. The green line is the difference between the Unemployment Rate and the estimate of the unemployment which in this case is the Congressional Budget Office estimate. I want to point out that in the early 90s and the early 80s when the Unemployment Rate moved up above the natural rate of unemployment which means the green line went above the zero line, inflation declined markedly. Now, if you look to the latest 2009 recession, you dont see such a decline in the inflation even though the Unemployment Rate went up. So inflation didnt come as much as it did in previous downturns and the models we were using back then could not explain the behavior of this inflation. So the failure of the models to explain this have a lot of research and papers. Robert gordons 2013 paper was the philips curve is alive and well. But then in 2018, wrote about the debt of the philips curve blinded in 2018 is the philips curve and most recently the philips curve that or is it just hibernating. And i think theres a fairly broad consensus that the relationship between unemployment and inflation has changed, but i dont think economies agree whether inflation has become completely disconnected from activity. So today i will argue that, yes, the philips curve relationship is not the same as 20 years ago but it has not completely disappeared. And i think that the philips curve framework is still a useful framework to think about. In the rest of my presentation i will provide an update of research ive done with one of my colleagues who is also here that has allowed us to look at the responses of different economic variables over time. So the model is a vector out to regression model whose coefficients are allowed to change over time, which allows us to look at responses. On the left panels weve plotted the responses of labor cost growth and on the right its the responses of core inflation on unemployment cap shock. Just forgot to mention we have four variables, a measure of inflation which is core market based inflation for the u. S. , import prices, a measure of slack which is the Unemployment Rate gap and wages or unit labor costs in this case. As you will see in the left panel, the response of labor costs to the unemployment cap shock have changed but not that much. At the same time, the response of core inflation to unemployment shock has changed a lot. This is the same thing you can observe in standard phillips curve models. Even though the red line which is the latest response to an unemployment cap shock is very small. Its not nonexistent. Its still there. If you look at the decomposition of recent movements in inflation so that inflation is plotted as the black line, theres a baseline forecast from this model which is the red dash line. And then the baseline model plus the effect of the structure of shocks in this case well look at the effect of the unemployment cap shock. You can see that the unemployment or slack in the economy is still an important factor for low frequency movements in inflation. Since this is a discussion of labor markets and inflation, i would like to address one question that we very often get. Are we measuring slack appropriately, is the unemployment cap an inadequate measure of slack. And these are all good questions. But going back to this picture, i want to point out this thing. The fact that we dont see a flattening of the wage phillips curve but we see a flattening of the price phillips curve means that it would be very hard to explain what we see on the right, but what we see on the left, its not coming entirely from the labor market developments. And there are other things going on. Thats why we are not the only panel presenting today. [ laughter ] so against the background of all these longterm changes in inflation dynamics that i plotted on the first slide, it has become increasingly difficult to discern from a single factor. It can be obscured by other factors affecting inflation. So before i pass onto jared, i would like to reiterate two things. Over the last couple of decades weve seen two major changes. One is the change in the trend which is now much more stable. The second is that we have a lighter phillips curve. We dont perfectly understand the reasons behind those changes. We have hypotheses and a lot of research is going on now but i dont think we have a very good understanding of whats driving them, which leads me to the final point that from a policy perspective, its worrisome how much do we think these trends will continue in the future, what will take us to move them away from there, and can we exploit the stability in a productive way. Thank you. [ applause ] thanks very much and thanks for inviting me. The center always comes up with the most interesting topics and gets, present company excluded, the most interesting people to talk about them. So this is a real great opportunity. Im going to buzz through a number of points that have just been relentlessly made today so i dont feel i have to spend my precious time on them. The first she took us through in an extremely clear fashion. Others have noted that the wage pc is steeper than the price pc. I think thats important for what im going to talk about in a somewhat different way although janet yellen references this in her talk, and that is the opportunity that the persistence of low or stable inflation in the flatter phillips curve determines for us in terms of achieving much tighter labor markets persistently and better yield to the people who are frequently left behind in slack periods. So thats going to be the core of my discussion for you today, the opportunity that these die dynamics present to us. The labor market, we are here to try to talk about the role of the labor market. It actually explains an increasing share of the variance of prices, more so than i thought. We still have that doesnt undermine the opportunity that i mentioned. These gains, by the way, the gains that im going to talk about and show you that are engendered by this opportunity, theyre not just about equalizing wage pressure. Ive been working on this area and the benefits of full employment for a long period of time. I tend to emphasize how the elasticities are larger for lower paid workers. Thats important. In that sense full employment is equalizing. What im going to talk about today is opportunities for people left behind on the labor supply side. The kind of conical story. This is just the unemployment gap plotted against a components mashup of five different wage theories. The two things i wanted to raise about this today is the first which is consistent with my theme which is that less page price passthrough which is the implication of this and something weve already heard about today, not zero, but less wage price passthrough further underscores the opportunity of a flat phillips curve to run lower for longer unemployment and tap the benefits that im going to show you in a minute. But i also think that this slide poses a bit of a challenge to those who want to argue that the regional phillips curve is perhaps a more important one or a more valid one or certainly a better identified one given the variance and the observations. Theres a lot more variance in unemployment if you get below the sub national level. We have a wage curve thats decently identified from the National Data and its tapping the same variance in the national Unemployment Rate. I guess im very interested in the fact that the regional phillips curves tend to be steeper, the ones at the msa or the state level. But im not sure that seals the deal as to solving the mystery. Because the National Wage phillips curve remains alive and well. How much variance does the labor market explain anyway . This is a very, very simple exercise that i think is hopefully somewhat revealing in the sense that if you just regress the expectations and you take out the residuals so you net out the part of the variance in inflation explained by expectations and you do a rolling regression on the residual using the ugap series. I think so far today weve only used cbos because thats only a mouse click away. So theres that. At any rate, then you start peeling off the r squareds from that. This slide shows you how 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 its started to climb up. This is very much consistent with katias point that its not everything but its not nothing either. In fact, Something Like 12 of the variance is explained. Therefore 12 of our time today should be spent talking about the labor market. These dynamics create an opportunity. Yes, theres a flat phillips curve. But at least as important weve had decades of higher inequality, longterm real stagnation for middle and low wage workers, lots of people in places left behind and Bargaining Power deficits that are offset by full employment. I recently wrote a paper with Keith Bentley where we concluded that these change in dynamics should create a symmetry in the feds reaction function to elevate the benefits of full employment and diminish the risks of inflationary pressures. I say that with recognition of janets point that those risks havent gone away and the flat phillips curve could be a problem on the other side if youre hit with persistent inflationary shocks. David miracle is an analyst from Goldman Sachs and he makes the same point. I only put that in there because hes you know, im sort of associated with the left side of the spectrum, so theres my point. Heres an inflation analyst arguing that the tight labor market poses less risk today and policy makers can exploit the disinflationary expects to run the labor market hot as long as expectations stay anchored. Thats really important and the key to my presentation. Here is some new work that i just released this morning on my blog with Keith Bentley. Its going to become a full paper for the unemployment project. This gets to the benefits of full employment in ways that you probably havent seen before. We look at all the different quintiles. But what this shows is the blue line is the employment rate. Its very cyclical. These folks are very responsive to the cycle in terms of their labor supply crossing the extensive margin. And the prediction uses the Unemployment Rate to predict the line. At some point youre saying one cyclical variable predicts another cyclical variable. Quintile. What i have on the right, im just going to focus on the circled numbers. We look at the share working in the bottom quintile. Looking at the 1990s because it was such a High Pressure labor market. There was a lot of other stuff going on in the 90s. All true. But there was also a really High Pressure labor market. If you look at the earnings of low income workers and this includes zeros, this is if you have earnings or if you dont. They grew by 50 or 50 log points. Because the three columns are multiplicative to the earnings column, basically the story is that half of that increase or almost half of that increase is crossing the extensive margin coming into the job market. For africanamericans, their earnings and im including zeros so annual earnings including zeros 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. That shifts in reverse in the bottom panel. When the economy sniffles, more economically vulnerable folks catch pneumonia. In the downturn half of those income gains were reversed and threefifths of that decline was people crossing the extensive margin the other way. So the cost to slack in the job market are particularly born in this group, but the benefits are quite pronounced. We show the most recent period of tight labor markets and while the gains arent as dramatic as they were in the hot 90s labor market, they are comparable and economically significant and large. Very important to these folks. Now what i have here is just the unemployment gap and thanks to my excellent r. A. I was able to do a dynamic slide. Here are just some recent headlines. These are headlines over the last few months. Tight labor market, disability may not be a barrier. I thought i was done, open doors for convicts. Lower income americans are increasingly job hopping to tap some wage increases. In conclusion, i want to thank the Federal Reserve for recognizing this opportunity. If you listen to the words of jay powell and other former fed officials here who said much of the same thing, you will hear him expressly making these connections. So i wanted to thank the fed for that, for tapping those benefits and i also want to thank the American People for their anchored expectations [ laughter ] which are key to all of this. Thank you very much. [ applause ] okay. So i just want to thank our panelists again for those great presentations. I have a lot of questions. We probably wont get through them all today. But one of the things i am curious about is how youre interpreting whats currently going on in the economy. So i think you both asserted and weve heard other people this morning assert while the price phillips curve seems to have flattened out a lot, theres still some action in the wage phillips curve. But when i look at wage growth now, it looks to me that its running at about the pace you would expect given productivity growth and inflation. So that doesnt actually seem to be suggestive of a hot labor market, which is how a lot of people are characterizing it. Is that some attenuation of the curve . My presentation was more focused on the longterm changes, but it has been a constant question why isnt the inflation back to target, why arent we at 2 . And if you remember, the chart i showed decomposing recent movements on inflation can explain why inflation was below the baseline forecast during the recession as the Unemployment Rate was high, it has gone back to zero so we dont get anything from slack at this point, which is understandable. But we are still not back to zero. What has happened, if i had time to shot another chart, i would have shown one that not only its the structural effect of the Unemployment Rate but also from import prices. That could explain a lot of what happened in 15 through 17 and 18. So it doesnt get us all the way there. The third thing on which i didnt have time to focus was on the trend too much. If you go back to the first chart, you will see the trend and the forecast is not 2 . Its more something closer to 1 3 4. Even though the trend has been very stable, its not been 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 theres been a little stronger wage growth at the bottom. Youre citing the average. This is consistent with my earlier point that the elasticities of wage growth relative to the tightening job market are stronger at the bottom of the scale. The second point is that probably maybe the most important is that probably the job market isnt really quite at full employment yet. That may sound somewhat controversial given how low unemployment is relative to these estimates of u star. Just based on the inflation data and the wage we can get as complicated as we want but the first simple realization is that were probably not yet at full employment. The third thing is worker Bargaining Power has been so severely diminished that its not going to take just low unemployment but low unemployment for a very long time. The share in the private sector is somewhere around 6 or 7 . Okay. Thanks. So another question i wanted to get at was to try to tease out a little bit more what you think is going on about wage passthrough into prices. Some of our other speakers this morning have talked about it but looking at it from the perspective of the labor market as well, we still see some evidence of a wage phillips curve, much less evidence of a price phillips curve. Prices have picked up a little bit. Wages have been pretty flat. What are your explanations for why these changes in wages arent translating more into Price Inflation . Again, well build on the research weve done on the passthrough from wages to prices. Because doing what we do at the board, this is a question we vrch get. We struggle to explain why we dont include wages on the righthand side of our price phillips curve equations. We began looked at the passthrough from wages to prices over time. Depending on what measure you use, if you use the more comprehensive compensation, you could see a steady decline over the years to the point where you dont see a passthrough from wages to prices. If you use the employment cost index, its more stable but not very big. Okay. Now, this is not to say that wages dont matter for prices. They should matter. They are twothirds of production costs. But i think what we found in this paper that if you plot in addition to the stochastic trend, if you do a similar one for unit labor costs, you will see they are both very stable. And in this stable stochastic trend environment its very hard to identify movements in wages that are translating to prices. In fact, what you find is that year to year movements in Price Inflation can reflect slack and can reflect import prices or other idiosyncratic factors, but its hard to identify movements from independent passthrough from independent Wage Movements to 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 Key Industries to be relevant to this conversation, to this question. You see this in retail, in health care, in technology. I sort of grew up in an economics where monopolistic firms took hold. Youre seeing it on the price side. Youre seeing it on the labor cost side. Some good papers where firm concentration seems to be correlated with diminished labor share. So using your monopoly power to kind of screw workers instead of on the price side. You know, i obviously think thats problematic and i think the tight labor market is starting to push back on that even though labor share is still uncharacteristically low even with the revision that took it up a bit. Its still uncharacteristically low. I always tell this to my friends on the fed who will listen to me, important caveat. [ laughter ] that there is room for noninflationary wage gains through a rebalancing of factor shares, through labor share catching up. Thats not a slam dunk because firms will resist that and may try to pass it through on prices. We havent seen a lot of that, as your question implies. 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 of slack. It was more a sufficient statistic for slack. I think this does raise the question of whether it no longer serves that role as a sufficient statistic for slack and where we need to be looking at a more comprehensive measure and weve getting a mixed signal about how much slack there is. I think that is a fine point and we should all try different measures in our model. Its kind of overblown because i recently did a blog on this where i just correlated the Unemployment Rate with all the other measures i could think of. And the correlations are really, really high. Theyre all above. 9 for the most part. My friend john roberts has done some work on sort of throwing a bunch of these slack variables into the washing machine and seeing what kind of comes out. I believe the Unemployment Rate kind of dominates. So yes, sure, other measures, but i wouldnt spend a ton of time on that. Ill just reiterate the point from my presentation that 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 phillips curve means theres Something Else going on in the price phillips curve that does not come from bargaining necessarily, Bargaining Power or the right measure of slack. Great. So the last question i want to ask before i turn it over to the audience is, actually, katia, im going to pick on you a little bit. Jared came out very strongly saying not much inflation, phillips curve seems flat, we have an opportunity here. You were sort of expressing i would say some concerns at the end of your talk. I was sort of curious, like do you think we have the space that jared asks, knowing youre not speaking for anyone in the Federal Reserve system, or do you think that the risks sort of dominate . Since im not speaking for anybody, i would say how i spent my days at the fed and in the morning i worry we are never going to get to 2 . The underlying trend is lower. We have to do something. In the afternoons what if we overshoot. So i think i am worried that, for example, if you look at the michigan survey, expectations have moved lower. Some would argue thats because people are just waking up and realizing inflation was never 3 . But that might be just a reaction to persistently low inflation that weve seen. It would be great to push those up, but only by threetenths. If we can do that, thats great. My concern is how confident are we that we can again, i am worried. I dont want to create the misimpression that im operating from a, what, nothing to worry about kind of perspective on the 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 in recent years on this is that i dont think we have a great and i think ive heard janet Say Something similar. Shell correct me if im wrong. I just dont think we have a great understanding of whats driving inflation dynamics these days. That means for now based on the empirical evidence i and others have presented we can tap the benefits that i was stressing as being so critically important to tap given the hour of whats befallen middle and low income folks. But when you dont know, what you dont know can help you, but it can also hurt you. Before we get to the questions, we have three labor market analysts up here. I dont think you should just ask questions. I think you should have to answer. Stephanie et al did a really important paper on the impact of tight labor markets recently. I think it was a brookings paper. One of the things you talked about was something very important that janet referenced in her comments. This is reverse historesis. What janet was referring to was the possibility that my slide showed all these people coming into the job market and yielding benefits. Historically theres been a problem of last hired first fired. People get into the job market. They dont stay in the job market. The idea is that perhaps tight labor markets can improve the supply side of the economy by pulling people in in a lasting way. I really want to hear what you have to say about that possibility. 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, the extensive margin that hot labor markets do pull people in and it has a bit of a persistent effect. I think our result was consistent with some of the micro literature. We use time series data, which i think have their limitations for looking at this issue. But its consistent, i think, with the micro literature which has found some shortterm effect that when people are pulled into the labor market and become employed, that they remain employed for a bit longer. So there are some lasting effects. As you said, this question is very crucial. If there were really a significant effect by running the economy hot we could really boost labor supply, that would reduce the tradeoff that the fed would face in setting interest rates. The one thing ive been thinking about is why arent these effects bigger. I think we all have the intuition that once someone comes in they gain experience, they create networks that they should have a more long lasting tie to the labor market. Part of the issue is what you said, that the economy largely operates as last hired first fired and people tend to be hired into very Cyclical Industries because those are the ones that are expanding employment a lot late in the cycle. And also then we dont run the economy hot for very long. The periods in which the Unemployment Rate is below the natural rate, they just arent that long. I think if you look to some other experiences in history that arent dependent on the business cycle, you actually see better evidence of hysteresis. That really significantly boosted womens labor supply. It was a permanent effect. Lots of women left the labor force in the 50s but it changed the way families operates and changing the structure of work and institutions. There is a powerful case that hysteresis can matter. The Macro Economy helps them jump over those barriers and the Macro Economy goes south, were going to have to do stuff to keep them in the labor market including job subsidies, Training Programs and things of that nature. Let me see if we have time for a few questions from the audience. Let me just gather a few. Danny, i think i see your hand. I want to answer your question about what variables actually enter wage equations. Ive worked on this the last 30 years. Post 2008 theres one variable that works and nothing else does. The Unemployment Rate doesnt work. U7 works. What u7 is the thing that drives u6. The reason its a quite good u7 works. The reason its really quite a good variable which explains why there isnt inflation. So when you run a wage equation in the u. S. Post 2008, the Unemployment Rate doesnt enter. The under employment rate does. So thats the answer to your question. I have several papers on it, a new one coming in. Its the only variable in the u. K. , in theust and in european countries. I dont buy your comment. Im sympathetic to that. Im a little embarrassed because we published one of your papers. With Great Respect for you and your work, i do get a little nervous when economists glom on to one variable that they really love. That often i just want to come to your question why the wage is steeper than the price. Sometimes banks are targeting inflation. So to the extent that theyre successful at it, inflation will be fairly constant and correlated with everything including slack. Now you might wonder, okay, why are we slightly undershooting in the case of the fed and not the uk . Maybe theres call for more expansion and Monetary Policy and the fed is targeting Wage Inflation and so that relation is freer to some extent and and its not on top of my policy. So the lowerincome folks, they cant get unions to help them so they go to the government and somehow the government becomes populist enough to contemplate a minimum wage increase. The lowincome people arguably would be the most affected by inflation, too, because they spend a greater portion of their income on necessities. So how high can we put the minimum wage without jeopardizing their security and the bottom fifth . Yeah. I will speak to that, but first, let me just point out one of the reasons i really enjoy hammering on this full employment, benefits of the full employment piece is that it is pretty nonpartisan and it isnt the fed doing stuff and the fed is in the mix, no question, but its really markets working for for low income people. You know, i guess from the evidence ive seen that you could go to 15 on a minimum wage which is something thats been proposed, but you would have to phase it in over a long period because there are places in the country where 15 an hour gets you to around the 40th percentile wage, but i think the research would support that idea. Okay. I would have to end the panel now. Thank you very much to our panelists. [ applause ]
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