Now It's Explicit: Fighting Inflation Is A War To Ensure That Real Wages For The Vast Majority Never

[applegrove]

Now It's Explicit: Fighting Inflation Is A War To Ensure That Real Wages For The Vast Majority Never Grow

by Josh Bivens at the Economic Policy Institute

http://www.epi.org/blog/explicit-fighting-inflation-war-ensure-real/

"SNIP...........................



Remember that episode of The West Wing when Josh Lyman announced a secret plan to fight inflation? That was great. Turns out that Dallas Federal Reserve Bank President Richard Fisher has a secret paper telling us how to fight inflation: stop progress in reducing unemployment so that nominal wages never grow fast enough to actually boost living standards (or, never grow fast enough to boost real wages).

Last week, Fisher argued that a so-far unpublished (i.e. secret) paper by his staff showed that “declines in the unemployment rate below 6.1 percent exert significantly higher wage pressures than if the rate is above 6.1 percent.”

In the interview, Fisher mostly characterized this as a Phillips curve that is flat at unemployment rates higher than 6.1 percent, but which starts to have a negative slope below this rate, meaning that future declines in unemployment should be associated with higher rates of wage-growth. However, if you’re really thinking in terms of a stable Phillips Curve, this means that we can simply choose what unemployment/wage-inflation combination we’d like without worrying about accelerating inflation. Currently, nominal wage-growth is running around 2-2.5 percent. But as we’ve shown before, even the Fed’s too-conservative 2 percent inflation target is consistent with nominal wage growth of closer to 4 percent. So we have plenty of room to move “up” Fisher’s Phillips Curve before hitting even conservative inflation targets.



Also, the 6.1 percent threshold, beside being funnily precise, jogged my memory about something related—and relevant. In 2000, Larry Katz and Alan Krueger wrote a long paper on wages and unemployment. Among lots of other stuff, they estimated the lowest unemployment rate consistent with zero real (inflation-adjusted) wage growth for different parts of the wage distribution (which they label URZERCG in the table below). See the circled bits below, and focus in particular on the 10th percentile. This says that between 1974 and 1988, the 10th percentile had to see unemployment below 6.2 percent to not have their real wages fall. In the 1990s, wage headwinds were worse, and unemployment rates below 5.7 percent were needed. The deterioration of structural wage growth was even worse for the median. In the 1974-1988 period, they could see real wage gains with unemployment as high as 6.8 percent, but by the 1990s they needed unemployment to reach 5.4 percent to see any inflation-adjusted wage gains.




............................SNIP"

[marym625]

1. Thanks for sharing

Very interesting. They should have thought about this before they cut the federal unemployment extension. That cut millions from the unemployment numbers.

I miss the West Wing. Was such a great show

[applegrove]

2. I'm sure the GOP is aware. Why do you think John Boehner was whining

about the long term unemployed not out looking for work?

[marym625]

3. But looking for work

When not receiving unemployment doesn't keep you on the unemployment numbers. That's why in January the numbers went down like they did.

Unless you mean so they would find a job then get canned?

[applegrove]

4. If they stop looking for work they put less pressure on wages because they are

out of that pool of people that make it an employers market where they can lower salaries and wages.

[marym625]

5. hmm.

I don't think that's right. The actual looking when not included in the unemployment numbers, I think, does nothing on the wages. I know quite a few people that were part of those hit when the repugs cut federal unemployment, myself included. I don't know a soul that stopped looking.

[applegrove]

6. I'm saying those who are looking are in the market of unemployed looking for work. How

big that market is....means the employers can offer lower wages because their is more competition for each job. The 6.1 percent where we are now is people looking for work who have not dropped out. And you know how the left always says well the numbers are higher because so many people have dropped out of the market and are not looking - that the rate should really be 12% or something like that. Those people unemployed and out of the job market are the people not looking for work. They are not in the job market. So they do not lower the wages. Why Boehner is whining. And if you whine about someone who is actually doing all the hard work while they get none of the credit, you have an abusive relationship. As the GOP has. With workers.

[marym625]

9. But they do not count

The people who are looking for work that are dropped from unemployment. They are considered "chronically unemployed" or "unemployable. "

Maybe we're not understanding each other. Regardless, I like the post!

[applegrove]

10. Really? They don't count all the people looking but not on UI? That surprises me.

[marym625]

13. nope

People like me just don't count.

Sucks

[progree]

23. The BLS says unemployment benefit receiver status not a factor in the NATIONAL unemployment rate

Last edited Sat Sep 27, 2014, 08:44 PM - Edit history (1)

The number receiving unemployment insurance benefits (and likewise the number submitting claims for unemployment insurance) is not at all factored into the national unemployment statistic. The count of the unemployed and the unemployment rate is not a count of those receiving unemployment benefits, nor is unemployment benefit receiver status factored at all into any of the national official unemployment rate statistics (U3, U4, U5, U6, etc.). Rather, the national unemployment rate is based on a survey of 60,000 households chosen at random. See: http://www.bls.gov/cps/cps_htgm.htm or Google: "Labor Force Statistics from the Current Population Survey"

However, as marym625 points out in #24, and discussed further in #30 --

"Labor force data from the LAUS program follow the same Current Population Survey (CPS) concepts and definitions used for the national labor force data. Because the CPS survey of 60,000 households nationwide is insufficient for creating reliable monthly estimates for statewide and substate areas, LAUS uses three different estimating procedures, each being the most appropriate for the level of geography being estimated. In general, estimates for the states are developed using statistical models that incorporate current and historical data from the CPS, theCurrent Employment Statistics (CES) program, and regular state unemployment insurance (UI) systems. These model-based state estimates are also controlled in "real time" to sum to the not seasonally adjusted national monthly CPS totals. Model-based estimates are also developed for seven large substate areas and their respective balances of state."

http://www.bls.gov/cps/cps_htgm.htm

[font color=red]Edited 9/27/14 738p CT to correct that while unemployment insurance (UI) data is not used to come up with the national unemployment rate, it is used as one of the model inputs to calculating state and substate unemployment rates

[applegrove]

36. Thank you.

[progree]

39. You're welcome, and thank you. I also corrected my #23 to say that unemployment insurance data is

used as one of the inputs of the models to calculate and state and substate unemployment rates, as pointed out by marym625 in #24.

[applegrove]

11. Rate measures the number of people actively looking for a job as a percentage of the labour force.

http://www.tradingeconomics.com/united-states/unemployment-rate

"In the United States, the unemployment rate measures the number of people actively looking for a job as a percentage of the labour force. This page provides - United States Unemployment Rate - actual values, historical data, forecast, chart, statistics, economic calendar and news. Content for - United States Unemployment Rate - was last refreshed on Saturday, September 27, 2014. "

[marym625]

14. But once you have been unemployed

For a certain amount of time (those whose unemployment has run out) you are not counted as unemployed but unemployable.

[applegrove]

15. If you stop looking for work.

[applegrove]

16. The rate is not calculated from only people receiving UI benefits.

Last edited Sat Sep 27, 2014, 08:25 PM - Edit history (1)

PeoP

[marym625]

26. Thank you

I did think, obviously, that it was the only number used. Now I know it is only part of it.

I do know is did change the numbers, at least in regional rates, when they cut the federal unemployment extension in December 2013.

I am thankful for the correct information

[progree]

22. Another myth -- that the long-term unemployed are not counted

But once you have been unemployed For a certain amount of time (those whose unemployment has run out) you are not counted as unemployed but unemployable.

People are counted as unemployed and included in the unemployment rate no matter how long they have been unemployed, as long as they tell the survey taker that they looked for work sometime in the last 4 weeks.

[marym625]

24. They do use UEI in calculating

regional numbers. Though it is not the only data used, it is part of the calculation.

"Labor force data from the LAUS program follow the same Current Population Survey (CPS) concepts and definitions used for the national labor force data. Because the CPS survey of 60,000 households nationwide is insufficient for creating reliable monthly estimates for statewide and substate areas, LAUS uses three different estimating procedures, each being the most appropriate for the level of geography being estimated. In general, estimates for the states are developed using statistical models that incorporate current and historical data from the CPS, theCurrent Employment Statistics (CES) program, and regular state unemployment insurance (UI) systems. These model-based state estimates are also controlled in "real time" to sum to the not seasonally adjusted national monthly CPS totals. Model-based estimates are also developed for seven large substate areas and their respective balances of state."

http://www.bls.gov/cps/cps_htgm.htm

[progree]

30. Thank you. I will have to modify what I wrote. But it's far from "not counting" people who are

not receiving benefits (as some people assert), even in the state and regional numbers.

I will have to dig in deeper, to see how the UI data is used in the state and regional numbers. But, besides being only part of the model, I note that they say (and included in your excerpt),

"These model-based state estimates are also controlled in "real time" to sum to the not seasonally adjusted national monthly CPS totals."

So all the state ones are adjusted to sum up to the national total -- which doesn't use UI data at all.

As for how the unemployment rate is affected by cutting off unemployment benefits, there are a couple of ways that come to mind:

Some people who no longer have any income coming in, look for work more urgently, and some of these find work, thus no longer being counted as unemployed

Some people, who were not really looking for work, but pretended to be so as to continue receiving UI benefits, drop the charade and quit telling survey takers that they are looking for work when they really aren't. That too will cut the official unemployment rate.

So while the national unemployment rate is not at all calculated from UI data, not even in part, the cut-off of benefits obviously does affect people's behavior, probably in ways that reduce the unemployment rate. As for state and regional unemployment rates, they will be affected the same way. As well as by directly factoring in UI data as part of their model.

Thanks again for the correction

[marym625]

31. Thank you

and those that corrected me. I honestly thought that UEI numbers were used nationally. I actually took a class in this years ago. I obviously remembered incorrectly.

I guess the only way to get an accurate count would be to ask the NSA (kidding)

Thank you again

[marym625]

33. see #32 please eom

[applegrove]

17. They have to answer a question "are you actively seeking work" but there is bias there.

Is it that bias you are referring to?

http://www.businessweek.com/articles/2014-08-27/whats-the-unemployment-rate-new-research-suggests-we-have-no-idea

"
The unemployment rate is calculated by averaging the results from eight separate samples of the population, known as rotation groups. In theory, the people in all eight rotation groups should have the same likelihood of being unemployed, but they don’t. In the first half of 2014, the newest rotation groups had an unemployment rate of 7.5 percent. The oldest rotation groups had an unemployment rate of just 6.1 percent.o0

..................

The jobless people in the rotation group that’s being interviewed for the first time are more likely to say they are actively looking for work, so they’re counted as unemployed. In the rotation groups that have been interviewed repeatedly and are about to be dropped from the survey, jobless people are more likely to say that they are not actively searching for a job, so they aren’t counted as unemployed. The increase in the bias over time, the authors say, seems to be from changes in the way people answer the survey questions, and an increase in people not responding at all.

The obvious question is what the real unemployment rate is. The authors say that the groups reporting high unemployment rates correlate more closely with independent measures of labor slack, namely total capacity utilization and the insured unemployment rate. But tweaking the official unemployment rate to give heavier weight to the new groups doesn’t seem to improve the accuracy of predictions of prices, wages, and GDP growth."

[marym625]

18. Yes. Thank you

I have been looking for a reference that wasn't just a blog

You can't answer if you're not asked. If your unemployment runs out no one asks

[applegrove]

19. These are groups of people who have unemployment rates of 7 or 6 %.

Of course people without unemployment benefits anymore could make it into the first group. Then they are asked. Up to them how they answer. If you have not been sampled you are like most people. Only a representative sample is.

[marym625]

32. Damn! that was so nice!

A disagreement with more than one person and we all talked it out without getting nasty or being condescending and snarky!

YAY US!

I just read this and I think it could come off as sarcastic. It is not. It is meant with all sincerity, relief and respect.

[applegrove]

34. We're cool

[marym625]

38. We are! :)

[progree]

35. Yes, I was thinking the same thing -- the way DU should be - we share information and learn from

each other, all without polemics or debating tricks or accusations of RW trollery. No juries or "hides" or starting a new thread about how *some* DU people (really meaning just about every DU-er except for a very small group of decent, enlightened people) seem to think or believe in some evil, non-progressive something-or-other, or are promoting some kind of awful "culture". Thanks!

A disagreement with more than one person and we all talked it out without getting nasty or being condescending and snarky!

[marym625]

37. Well put!

all around!

[progree]

21. The unemployment rate is not based on a count of people receiving unemployment benefits

They should have thought about this before they cut the federal unemployment extension. That cut millions from the unemployment numbers.

The number receiving unemployment insurance benefits (and likewise the number submitting claims for unemployment insurance) is not at all factored into the unemployment statistics. The count of the unemployed and the unemployment rate is not a count of those receiving unemployment benefits, nor is unemployment benefit receiver status factored at all into any of the official unemployment rate statistics (U3, U4, U5, U6, etc.). Rather, the unemployment rate is based on a survey of 60,000 households chosen at random. See: http://www.bls.gov/cps/cps_htgm.htm or Google: "Labor Force Statistics from the Current Population Survey"

[marym625]

25. It is in regional counts

http://www.bls.gov/cps/cps_htgm.htm

[customerserviceguy]

7. I'm old enough to remember inflation

And if you think it was a bed of roses to get pushed into higher and higher tax brackets while the cost of living was going up as fast (or faster) than your wages, then you need to learn some history.

[applegrove]

8. Yes. Inflation is bad. But if you are old enough to remember inflation you are old

Last edited Fri Sep 26, 2014, 11:21 PM - Edit history (1)

enough to remember tight money policy of 1990 or so. Where the fed upped the bank rates, which slowed the whole economy down. To fight the good fight against inflation. Which was important. And the rich lost out just like the unemployed did of that time. They were all in the fight of inflation together. My point is that if the unemployed are fighting inflation and the rich are not right now, unlike in the past, what will the rich do to do their part in this economy? They should pay all their taxes at the very least. That would be the price of have an economy that allows them to not have a slowdown in their neck of the woods. Instead they whine that the unemployed are not trying hard enough to find a job (some of the unemployed are not in the active job market helping push wages down, thus not fighting inflation for the whole nation on their own unlike those who are job searching). And John Boehner is scolding them for not fighting inflation hard enough...and calls them lazy. Who exactly are the lard***** in this current case? (Or lardhearts, or lardheads)

[customerserviceguy]

20. Inflation is not an issue right now

Nor will it be for the forseeable future. I figured with all the money the Federal Government has been borrowing, it should have skyrocketed, that's what all the gold bugs figure when they buy their shiny bits of metal. But clearly, the amount of the national debt has not had the effect on inflation that my Milton Friedman textbook of my economics class forty years ago said it would.

Our challenge is income inequality. That's something that really went into high gear during Dubya's years, with the tax breaks given to the very well off. We got a measure of justice when the Congress blinked at the end of 2012, and passed a tax bill that retained a fair deal for the middle class, while kicking the top bracket up a bit, but we have quite a bit further to go.

[progree]

28. The basic tax brackets are adjusted for inflation now ...

I'm old enough to remember inflation

And if you think it was a bed of roses to get pushed into higher and higher tax brackets while the cost of living was going up as fast (or faster) than your wages, then you need to learn some history.

I think it was back in the early 1980s when they finally adjusted the tax brackets for inflation. Speaking of the basic tax tax table tax brackets, standard deduction, and personal exemption.

Unfortunately, some numbers aren't inflation adjusted, such as the Modified AGI (MAGI) amounts at which Social Security benefits are taxed -- for example for singles and heads of households: up to $25,000, not taxed; between $25,000 and $34,000 -- 50% of that is taxable; and above $34,000 -- 85% is taxable.

Back when the law was written with those thresholds, those were big incomes, especially for retirees. Now, they cut deep down into the middle class. And year after year with creeping inflation, they cut further and deeper.

[customerserviceguy]

29. They are indeed

The values of personal exemptions and standard deductions are also adjusted for inflation. That happened just about thirty years ago, and since then, we've not seen an inflation rate higher than 5.65 percent since then. In fact, during most of that period, and in the majority years since the Clinton Adminstration began, the rate's been between 1 and 3 percent. Contrast that with the double-digit rates that happened during the Seventies and early Eighties, and you'll see that we've made a massive shift out of an inflationary economy.

Once you took the government's stake out of keeping inflation high, there was no incentive for the US government to tolerate it. And it's not like they haven't done things that would have been considered 'inflationary' by the standards of the economics textbooks I was reading in the mid-1970's, its just that the economic thinkers of that time were obviously wrong.

I agree, we should have indexed any sort of fixed-dollar amount thresholds or limits to inflation as well. The child care tax credit has been slashed because of a failure to do this. But, like you said, they have been creeping. When the massive inflation of 40-50 years ago was going on, Congress could pass laws to up the dollar amounts, and look like 'heroes' who were giving benefits to voters. Indexing takes that away.

[blkmusclmachine]

12. ,

,