There was a time when wage demands
were the bugbear of central banks and politicians. That was when they were
battling spiralling inflation with all its problems for a stable economy. Rapid
price increases created demands for higher wages to compensate for lowered
buying power, which meant that employers had to increase prices in turn to
remain viable, which led to …more inflation.
Now the boot is well and truly on the
other foot. On both sides of the Atlantic, in Washington and London, the powers
that decide when and if interest rates are to rise are no longer focused on
employment figures but rather on the rates of pay for those citizens who have
jobs.
This fact was borne out by the
minutes of the last FOMC meeting, which were released last evening in GMT terms,
where the desire of the committee members to signal a timetable for an increase
in rates is bedevilled by the worry about slack in the economy, characterised by
the low level of wages and wages growth that have accompanied concrete
decreases in the unemployment figures.
This is an excerpt from the minutes:
“Several
participants commented that the relatively subdued rise in nominal labor
compensation was still below longer-run trend rates of productivity growth and
inflation and was a signal of slack remaining in the labor market”.
It is not straightforward, however.
Here is more:
“a
couple of others suggested some caution in reading subdued wage inflation as an
indicator of labor market underutilization”.
So. You pays your money and you takes
your choice.
Slack
in the economy is an issue on both sides of the Atlantic
Over in the UK, Mark Carney, governor
of the Bank of England, is on record as saying that even when adjusted for inflation (emphasis added), wage rates are
some 10% lower than they were before the Global Financial Crisis. He claims
that one would have to go back to the 1920s to find a comparable situation.
Low average wages are taken to mean
that large numbers of people are just making do with jobs that they are not
really interested in. This is an unsustainable situation and one that does not give
central bankers the confidence to believe that their economies are out of the
recessionary woods just yet.
Later today we will have the Bank of
England (BoE) Monetary Policy Committee decisions on interest rates and the
Asset Purchase Facility. No doubt Mr. Carney and his colleagues will bring us
up to speed on the latest deliberations on this issue of slow wage growth
allied to falling inflation, and their implications for interest rates.
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