Hello, welcome back. Were going to get started on the rest of the event. So im very excited to introduce our next panel. Its all about the labor market. We have two great panelists. The first is were going to hear from katia peneva from the Federal Reserve board. Just to provide some context, thats the section thats responsible for preparing the forecast of inflation and wages and prices for the fomc. I have to admit that we were longtime colleagues and i want to assure any lawyers that are here that none of our conversation should be interpreted to constitute my making a request of katia, the Federal Reserve system or the fomc, so were clear. Our second panelist is jared bernstein, a senior fellow at the center on budget and policy priorities and hes been very active for many years thinking about the labor market, inequality and macro policy from his positions both within the Obama Administration and within various think tanks here in d. C. You can read more about his thoughts in his blog on the economy. So let me turn the presentation over to them. Thank you very much, stephanie. Its a pleasure to be here. Okay. So in the spirit of making exclaimers, i could 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 the Research Staff at the Federal Reserve system as a whole. With that said, ill start my presentation by illustrating some of the points that our former fed chair, janet yellen, made in her opening remarks. So the first chart is a chart of the four quarter changes in u. S. Core inflation as measured by the pc price index since the 1970s. And 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 two decades, inflation has moved in a 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 two decades, inflation, core inflation can be well characterized empirically in terms of transitory movement around the stable longterm trending. These fluctuations in turn can reflect chances in supply or other temporary influences. And economies often view the stability of the trend over the past two decades as resulting from better Inflation Expectations or the inflation outcomes themselves that have been engineered by Monetary Policy. However, theres not that much evidence to support that view. Now, turning to slack, i just want to give a little background to the phillips curve. In the late 1950s, William Phillips documented a negative relationship between wage crawl and the Unemployment Rate. Soon thereafter economies confirmed this relationship for a lot of further developed economies. Now, labor costs are about 60 of the firms production costs. So intuitively they should matter a lot for the pricing. And indeed in the mid60s there was a negative relationship to the Unemployment Rate and Price Inflation, which we now refer and we refer to this negative relationship these days as the phillips curve. This curve this relationship has also changed a lot over the past half a century, so what ive plotted here, the black line is still again core inflation in the u. S. And the green line is the difference between the Unemployment Rate and an estimate of the unemployment which is the Congressional Budget Office sets. And when i talk about the relationship having changed, i want to point out the recessions, 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. In addition, each of these recessions had the persistent effect on inflation. Now, if youll look to the latest 2009 recession, you dont see much a decline in the inflation even though the Unemployment Rate cap went up. And 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 triggered a lot of research and a lot of papers. Ill just mention the names of a few of those papers. Robert gordons 2013 paper was the phillips curve is alive and well but in 2018 it was written about the death of the phillips curve. And then most recently, is the phillips curve dead or is it just hibernating. 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 the activity. So today i will argue that, yes, the phillips curve relationship is not the same as 20 years ago, but its just not completely disappeared. And i think that the phillips curve framework is still a useful framework to think about when discussing inflation dynamics. In the rest of my presentation, i will provide an update of research that ive done with jeremy rath, 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 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 costs growing during unemployment and on the right its the responses of core inflation on unemployment gap shock. We have four variables, a measure of inflation, which is core market based inflation for the u. S. Relative import prices, a measure of slack which is the Unemployment Rate gap and wages or unique labor costs in this case. And as you will see in the left panel, the response of labor costs to the unemployment gap have changed but not that much. At the same time the response of unemployment has not changed and this is the same thing you observe in phillips curve models. I will also say even though the red line, which is the latest response to unemployment gap shock is very small. Its not nonexistent, its still there. And 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 dashed line and then the baseline model plus defect of the structural shocks in this case will look at the effect of the unemployment gap shock. And you can see that the unemployment or second to the economy is still an important factor for low frequency movements in inflation. So 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 it properly. Is unemployment gap an estimate 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 lengthening 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 just not coming entirely from the labor market. There are other things going on and thats why we are not the only panel presenting today. So against the background of all these changes, longterm changes in inflation dynamics that i plotted on the first slide, it has become increasingly difficult to determine the effect of a single factor. That doesnt mean its not important, its just difficult and can be obscured by other factors that are affecting inflation. So before i pass on to jared, i would like to, again, 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 flatter phillips curve. The thing is we dont perfectly understand the reasons behind those changes. We have hypothesis and a lot of research has been done but i dont think we have a good understanding of whats driving them. The final point, 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 explore the stability in a productive way. Thank you. Well, thanks very much and thanks for inviting me. The Hutching Center 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 katia took us through in extremely clear fashion. Others have noticed that the wage pc is steeper than the price pc. And i think thats important for what im going to talk about in a somewhat different way that hasnt been raised today, although janet yellen referenced this in her talk, and that is the opportunity that the persistence of low and stable inflation and the flatter phillips curve provides for us in terms of achieving much tighter labor markets persistently and the benefits that those yield to people who are frequently left behind in slack periods. So thats going to be the core of my discussion to you today, the opportunity that these dynamics present to us in helping some folks who really need the help. The labor market actually explicits, as katia suggested, we are here to try to talk about the role of the labor market, it actually explains an increasing share of the variance in prices, more so than i thought. You know, we still have that doesnt undermine the opportunity that i mentioned. And these gains, by the way, it wont surprise this crowd, the gains that im going to talk about and show you that are enjerne engendered by this opportunity, theyre not just about equaling wage pressure. Ive been working on this area and the benefits of full employment for a long time. I tend to emphasize how elasticities are larger for lower paid workers and in that sense full employment is equalizing. What im going to talk about today is more about labor opportunities for people left behind on the labor supply side. The story about the wage phillips curve being more steep and on the lefthand side quite nonlinear, this just the unemployment gap plotted against a principal components mashup of five different wage series. On the righthand side its a much more random storstory. The two things i wanted to raise is the first which is consistent with my theme which is less wage price passthrough, which is the implication of this and something weve heard about from this stage 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 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 more valid one or certainly a better identified one given the variance and observations. Theres a lot more variance in unemployment if you get below the subnational level. Well, we have a wage phillips curve thats actually decently identified from the National Data and its tapping the same national variance in the Unemployment Rate. So 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 that seals the deal as to solving the mystery. Because the National Wage phillips curve remains alive and well. So how much variance does the unemployment does the labor market explain anyway . So this is a very, very simple exercise that i think is hopefully somewhat revealing in the sense that if you just regress the change in core inflation on Inflation Expectations and then you take that residual, so you net out the part of the variance in inflation that is explained by expectations and then you do a rolling regression on the residual using the u minus u star and i think so far today weve only used cbos, because thats just a mouse click away, so theres that. And then you just start peeling off the r squareds from that. This shows how much of a variance in inflation does the labor market explain. In recent years it hasnt explained very much at all but its started to climb up and 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 and, therefore, 12 of our time today should be spent talking about the labor market. Okay. This is the core of what i wanted to talk about. 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 the dynamics should create asymmetry to diminish the risks of inflationary pressures. I say that with recognition of janets point that those risks havent gone away. In fact the flat phillips curve could be a problem on the other side if youre hit with inflationary persistent inflationary shocks. I cite david maricle and he makes the same point. I only put that in there because hes im sort of associated with the left side of the spectrum and so theres my point. Heres an inflationary analyst arguing a tight labor market poses less risk today and policy makers can exploit the disinflationary effects as long as Inflation Expectations stay anchored. I think thats really important and the key to my presentation. Here is some new work that just released this morning on my blog with Keith Bentley. Its going to become a paper for our full employment project. This gets to the benefits of full employment in ways that you probably havent seen before. We take the we look at all the different quintiles. On the righthand side you basically have whats an employment rate. Its an annual measure so its a little different than the employment rate we look at every month from the bls. The blue line is the employment rate and its very cyclical. So these folks are very responsive to the cycle in terms of their labor supply crossing the extensive margin. And the prediction there simply uses the Unemployment Rate and lag dependent variable to predict the line. At one level youre saying one cyclical variable predicts another cyclical variable. If you look at 3, 4 or 5 you dont see much at all so its a story for low wage workers. Theyre the ones that will be most equipped by this. So what i have on the right, i know there are a lot of numbers there but ill focus on the circled ones. So we look at the share working in the bottom quintile and im looking at the 1990s. Some of you were thinking there was a lot of stuff going on in the 90s, welfare reform, itc expansion, minimum wage increase. All true but there was a High Pressure labor market. In fact if you look at the earnings of lowincome workers, and this includes zeros, okay . This is if you have earnings or if you dont. They grew by 50 or 50 log points. And because the three columns are multiplicative half of that increase, 23 over 49 or almost half of that increase is crossing the extensive margin coming into the job market, okay . If you look at the for africanamericans, their earnings, and im including zeros, so annual earnings including zeros more than doubled over this highpressure labor market and half of the increase was crossing the extensive margin, was increasing in the share of work and that shifts in reverse in the bottom panel, you know, when the economy sniffles, more economically vulnerable folks catch pneumonia. In the downturn, the half of those income gains were reversed, fell 50 , and 3 5 of that decline was people crossing the extensive margin the other way. So the costs to slack in the job 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 tight labor markets. And while the gains arent as dramatic as they were in the 90s labor market, they are comparable and they are economically significant and large. Very important to these folks. So 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. And here are just some headlines, recent headlines. So 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 in order to tap some wage increases. So in conclusion, i wanted to thank the Federal Reserve for recognizing this opportunity. If you listen to the words of jay powell and others, other officials former fed officials who are here 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, which are key to all of this. Thank you very much. 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 others assert while the price fiphillips curve has flatten out a lot, theres still some action in the wage phillips curve. It looks to me that its running at about the pace that you would expect given productivity growth and inflation so that doesnt seem to be suggestive of a hot labor market, which is how a lot of people are characterizing it. Im sort of curious how you interpret that. Is it actually some a10 wags of the wage phillips curve, are there other things going on, is the National Rate much lower . Give your thoughts on that. Ill start. So on the question, my presentation was more focused on the longterm changes. But its just been a constant question why isnt inflation back to target, why arent we at 2 . If you remember, the chart i showed the recent movements on inflation and how slack can explain why inflation was below the baseline forecast during the recession as the Unemployment Rate was high. It has come back to zero so we dont get anything from slack at this point, which is understandable, but we are still not back to zero. So what has happened, if i had plotted, if i had time, to show another chart, i would have shown one that not only its the structure effect of the Unemployment Rate but also from import prices. And that could explain a lot of what happened in 15 through 17 and 18. But it doesnt get us all the way there. And the third thing on which i didnt have time to focus was on the trend. If you go back to the first chart, you will see that the baseline forecast from the model is not 2 , its more something closer to 1. 75 . So even though the trend has been very stable, it has not been at 2 . So 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 little stronger wage growth at the bottom, so 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 probably maybe the most important, that probably the job market really isnt quite at full employment yet. That may sound somewhat controversial given how low unemployment is relative to these estimates but theres a huge confidence interval around those estimates. Just based on the inflationary data and the wage data, we can get as complicated as we want, but the first order simple realization is that were probably not yet at full employment. And the third thing is worker Bargaining Power has been so severely diminished that its going to take not just low unemployment but very low unemployment for a very long time. Remember, the unionization share 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 with about wage passthrough into prices. Some of our other speakers this morning have talked about looking at it from the perspective of the labor market as well. We see some evidence of a wage phillips curve, much less evidence of a price phillips curve. Inflation has been pretty flat, core inflation. So what are your explanations for why these changes in wages arent translating more into inflation, Price Inflation. So this again will build on the research weve done with jeremy rath on the passthrough from wages to prices because doing what we do at the board, this is a very we very often get. We struggle to explain why we dont think good wages on the righthand side of our price phillips curve equations. So we again looked at the passthrough from wages to prices over time. Depending on what measure you use, if you use the markham comprehensive compensation, you can 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. 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 stocastic trendi trending, if you do a similar one for union labor costs, you will see they are both very stable. In this stable stocastic 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 inflation, in Price Inflation can reflect slack and can reflect import prices or other idiosyncratic factors, but its hard to identify movement from independent passthrough f m 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, you see it in health care, you see it in technology. Dominant firms now, i sort of grew up in an economics when sort of monopolistic firms took hold. You saw it on the price side. Youre not saying it so much on the price side, where youre seeing it is the labor cost side. So some good papers where a firm concentration appears to be correlated with diminished labor share. So using your monopoly power to screw workers instead of on the price side. And i obviously think thats problematic and i think the tight labor market is starting to push back on that, even though labor share is uncharacteristically low even with the recent revision that took it up a bit. I walk around thinking this is an important source, and i tell this to my friends on the fed who will listen to me, the important caveat, that there is you know, that theres room for noninflationary wage gains through a rebalancing of factor share, through labor share catching up to something to its closer historic levels. Thats not a slam dunk because firms will resist that and 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 internal measures of slack. The Unemployment Rate was never a comprehensive measure of slack, it was more a sufficient statistic of slack. But i think this raises the question of whether it no longer serves that role of a sufficient statistic of slack and whether we need to look at a more comprehensive measure and were getting a mixed signal about what slack is. I think that is a fine point and we should try different measures on our model. But in my view its actually 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. The correlations are really, really high. Theyre all above 0. 9 for the most part. My friend job rhn roberts is ine audience, an excellent fed economist and has done some work on throwing a bunch of these slack variables into a kind of a filter washing machine and seeing what comes out. And i believe, as john will correct me if im misrepresenting this, the Unemployment Rate kind of dominates. So yes, sure, other measures but i wouldnt spend a ton of time on that. I will 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. 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 sort of expressed some concerns at the ending of your talk and i was sort of curious, do you think we have the space that jared asks knowing that youre not speaking for anyone in the Federal Reserve system or do you think that the risks sort of dominate . So 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 und underlying trend is lower. In the afternoon, its what if we lose control of Inflation Expectation and we all worry. So i think i am worried that, for example, if you look at the michigan survey, expectations have moved and some will argue that thats because people are just waking up and realizing inflation was never 3 , but it might just be a reaction to persistently low inflation that weve seen. And it would be great to push those up, but only by 0. 3. And if we can do that, thats great. My concern is how confident are we that we can get the economy to get it exactly. So again i am on both ends 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 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 that for now based on the empirical evidence that i and others have presented, we can tap the benefits that i was stressing as being so critically important to tap, given the history of whats befallen middle and low income folks. But when you dont know you know, what you dont know can help you but it can also hurt you. Hey, before we get to the questions, we have three labor market analysts up here and i dont think you can just ask questions, you should have to answer them. Stephanie did a really important paper on the impact of tight labor markets recently. I think it was a brookings paper. And one of the things you talked about was something i think very important that janet referenced in her early comments. This is the possibility of reverse historesis. It sounds like a bad disease but its actually well, its the reversal of a bad disease. What janet was referring to as 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 but dont stay in the job market. The idea is that perhaps tight labor markets can actually improve the supply side of the economy by pulling people in in a lasting way. I know youve thought and written about that and i really wanting to hear what you have to say about that possibility. 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, 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 microliterature. We used time series data which i think had their limitations for looking at this issue but its consistent, i think, with the microliterature which has found some shortterm effects that when people are pulled into the labor market and become employed that they remain employed for a bit longer, and so there are some lasting effects. As you said, this question is very crucial because if there really were significant history to this effect whereby running the economy hot, we could reduce labor supply and reduce the tradeoff that the fed would face in setting interest rates. So 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 longlasting tie to the labor market. I think part of the issue is precisely 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 National Rate just arent that long. If you look to other experiences in history that arent dependent on the Business Cycle, you see better evidence of historesis. Thinking about womens entry into the labor force after the second world war, that went on a number of years and boosted womens labor supply. It was a permanent effect. Lots of women left the labor force in the 50s but if you read the literature, it really laid the groundwork for womens entry into the labor force by changing the way families operated, by changing the structure of work and institutions. So i think there is a powerful case that history says can matter. Im not sure if the Business Cycle frequency, at least to the extent that weve let it operate in recent years, that you would see those effects. I think one of the problems is that we all talk about this from the macro economics and thats fine, its a great baseline. But it will take micro policy to achieve historesis. Well have to do stuff when the Macro Economy helps them jump over the barriers and then the Macro Economy goes south, we have to do stuff to help keep them in the job market, including job subsidies, Training Programs and things of that nature. Okay. So 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. Hi, jared. I want to answer your question about what variables are in wage equations. Ive worked on this for the last 30 years. Turns out in the uk and everywhere else post 2008 one variable works and nothing else does. The Unemployment Rate doesnt work. U 7 works. What u 7 is what drives u 6. The reason its really quite a good variable which explains why theres no inflation is it hasnt been reverted. It hasnt within reverted in any country in the world. So when you run a wage equation in the u. S. Post 2008, the Unemployment Rate doesnt enter, sorry, jared, it doesnt, but the underemployment rate does. So thats the answer to your question. I have several papers on it and a new one. But its the only variable in the uk, in the u. S. And in panels of european countries. So i dont buy your comment that the Unemployment Rate works. It doesnt work. Im sympathetic to that. Im a little embarrassed because we published one of upper papers. Your papers. But with Great Respect for you and your work and i think youre largely right, i do get a little nervous when economists glom on to one variable they really love. That often doesnt ending well. [ inaudible ]. I just want to come to your fill question of why philips curve for wages 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 of Monetary Policy. But the fed is targeting Wage Inflation and so that relation is freer to some extent and its not on top of my policy. So the lower income 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. So how much you know, the lowincome people arguably would be the most affected by inflation, too, because they spend a greater proportion 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. Everybody should support that. And its not government necessarily doing stuff. The fed is in the mix, no question, but its really markets working for lowincome 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. Thanks again very much to our panelists. [ applause ]
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