One striking feature of the Thursday labor market report was the mix of declining unemployment — now down to 5.3 percent — and continuing sluggish wages, not to mention low rates of price inflation; read Neil Irwin. Normally we would expect all the demands for those new hires to boost wages more. What is going on?
I sometimes hear it argued that there is a good news aspect to this development, suggesting that the absence of wage pressures indicates there are many more people to be hired. I wonder if this argument makes sense. If we don’t observe a worker willing to take a job for current wages, how is that a cause for optimism about future reservation wages for those same workers? I would think it implies some slight pessimism about whether those individuals will end up working again. I’m not sure those workers are going to be worth so much more in the market anytime soon.
Just to jog your memory, the data do not indicate much of a stable Phillips curve.
Alternatively, you might think the employment of those remaining unemployed workers is constrained by demand side forces. I find that unlikely at this late date in the recovery but even so, this demand side hypothesis also gives no particular reason for optimism, given a very conservative Fed.
Liquidity trap models do not explain why the rate of price inflation continues to be pretty much where the Fed wants it to be, and thus they also do not explain this constellation of market forces. There is too much labor market recovery going on.
I find the most plausible explanation to be a version of The Great Reset. A lot of workers have been revalued by the market downwards, but most incumbents are not taking pay cuts in real terms because they have insider power. New hires, however, are not granted equally favorable terms. If wages are steady as new hires pick up, this is in fact upward pressure relative to the counterfactual that otherwise those wages would be falling. Flat wage are indeed what “things heated up” looks like, and it’s a good thing we had that gas price decline to bump real wages up just a bit.
On the whole, that’s not good news either.