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Phillips Curve Conundrum - March 13, 2018

Phillips Curve:

Last week saw the release of a smorgasbord of employment data, from Average Hourly Earnings and Labor Force Participation, to Nonfarm Payrolls and Unemployment, whose release prompted Fed member Neel Kashkari to tweet, tongue in cheek:


“We were at maximum employment. We are now at maximumer employment.”


However, as Lael Brainard noted in a speech to the NYU Money Marketeers club:


“One of the striking features of the current recovery has been the absence of an acceleration in inflation as the unemployment rate has declined, a development that is consistent with a flat Phillips curve. Although wage gains have seen some recent improvements, they continue to fall short of the pace seen before the financial crisis.”

And while she didn’t want to speculate on the dynamics due to a small sample size:

“We do not have extensive experience with an economy at very low unemployment rates and cannot be sure how it might evolve.”

Other people have weighed in on the dynamics underneath wages, low unemployment, and the Phillips curve.

Janet Yellen addressed the topic in a speech given at Jackson Hole, “Labor Market Dynamics and Monetary Policy” all the way back in 2014, looking into labor market slack. Even in the dusk of her term, the problem of labor market dynamics dogged her, as mentioned in her September 26, 2017 speech “Inflation, Uncertainty, and Monetary Policy”, concluding:

“... the outlook is uncertain, reflecting, among other things, the inherent imprecision in our estimates of labor utilization, inflation expectations, and other factors.”

In 2017, Harvard Business Review jumped into the topic, citing a decline in labor’s share of income, increased inequality in wage distribution, deteriorating economic dynamism, and labor market slack as answers to “Why Wages Aren’t Growing in America”.


And finally, the ever-informative Epsilon Theory addressed wages in its 2017 article, Gradually then Suddenly.

With NFIB Small Business Optimism coming out today at break neck levels last seen in the 1980s and finding qualified workers remaining the number one problem for small business owners, there’s a chance that the tide could be starting to turn.


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