Monday, May 16, 2011

Wage Growth Targeting.

Mike Konczal at Rortybomb talks about a Makiw and Reis paper that came to his attention through a post made by Matt Rognile at I've been thinking a lot about inflation recently becuase I've been reading about the late 60s/70 recently and there was a flare up over inflation targeting in the blogosphere after Bernanke's press conference.  Matt posts a lot about inflation that I disagree with, but it's definitely to his credit that disagreeing with him means whipping out google scholar.

Anyway, the thing from the paper Mike picks up:
Mankiw writes about his ideal target using that criterion and brought up an interesting historical story:
Our results suggest that a central bank that wants to achieve maximum stability of economic activity should give substantial weight to the growth in nominal wages when monitoring inflation…
 An example of this phenomenon occurred in the United States during the second half of the 1990s. Here are the U.S. inflation rates as measured by the consumer price index and an index of compensation per hour:
1995 2.8 2.1
1996 2.9 3.1
1997 2.3 3.0
1998 1.5 5.4
1999 2.2 4.4
2000 3.3 6.3
2001 2.8 5.8
Consider how a monetary policymaker in 1998 would have reacted to these data. Under conventional inflation targeting, inflation would have seemed very much in control, as the CPI inflation rate of 1.5 percent was the lowest in many years. By contrast, a policymaker trying to target a stability price index would have observed accelerating wage inflation. He would have reacted by slowing money growth and raising interest rates (a policy move that in fact occurred two years later). Would such attention to a stability price index have restrained the exuberance of the 1990s boom and avoided the recession that began the next decade? There is no way to know for sure, but the hypothesis is intriguing.
It’s things like this that make me worried about being creative with inflation targeting. No notable inflation in the economy and the only period of sustained wage growth in my lifetime – better get the central bank to choke that off immediately.  Can some Republican officially propose “price stability and minimal wage growth” as the new dual mandate for the Fed?
First Mike already kind of makes this point but in the Mankiw and Ries paper they say that the central bank in their model targets inflation, so it's sort of confused to then present the example above as a way in which their model suggests central banks can smooth output.  Second, the evidence is mixed at best (here is a short paper by Hess and Schwietzer at the Chicago Fed) that wage increase cause price increase and not the other way around.  So, while the theory may point to wage targeting does it even make a difference in practice?  .

For me, it comes down to the idea of who enjoys the fruits of productivity gains in the real world.  It is conventional wisdom (that may be wrong!) that wages have not been keeping up with productivity gains over the last 30 or 40 years.  In fact, the late 90s were one of the few periods where there was a chance for labor to "catch up" because unemployment was so low.  Price inflation targeting--while not my favorite way to do monetary policy--at least forces (ideally) both capital and labor to "share the pain" with wage growth it seems to be you would just be capping wages without capping profits.

I mean, it seems like the market has been doing this anyway but it's not quite clear what you get from enshrining that as policy.

No comments:

Post a Comment