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Liquidity and Labor - October 1, 2019

“Can Only Be Fixed with Rate Cuts”

Two weeks ago, markets were reeling as the Fed stepped in to fix some plumbing problems in the short-term financing markets. Since then, the Fed has continued its operations to calm the market turbulence. Though things appear to be going smoothly, an article from Izabella Kaminaska indicates all is not well. In “There’s a black hole in the dollar funding market”, published prior to the Fed’s intervention, Kaminaska summarizes and excerpts research from Zoltan Pozsar of Credit Suisse. Pozsar breaks down the “dollar funding” story, and ultimately finds that “the Fed may have overdone its hiking cycle, something that now can only be fixed with rate cuts”. And not just a slow drip of easing, but “rate cuts that are aggressive enough to re-steepen the curve so that dealer inventories clear; cuts deep enough to incentivize real-money investors to lend long”. If the Fed is unable to act, the current funding environment has “the makings of a fresh liquidity crisis.”

“Wages Stink”

Some of the topics we’ve followed are the labor share and the puzzling relationship between unemployment and wages, linked through the Philips Curve. Adding to the conversation about labor share this week were Sylvain Leduc and Zheng Liu from the San Francisco Fed. In “Are Workers Losing to Robots”, Leduc and Zheng stray from models that assume a frictionless labor market, and instead price in the “costly search process” for both job seekers and businesses alike. The authors can account for automation, and find that “automation gives employers another option in wage negotiations and thus weakens workers’ bargaining power”. Leduc and Zheng describe a scenario without automation and find that “productivity would have risen even less than it actually did, while wages would have risen more”. However, robots aren’t all bad news. The authors argue that automation has “a positive impact on aggregate employment and thus has contributed to the steady decline in the unemployment rate in recent years”.

Jonathan Tepper offers a broader perspective in his oldie but goodie “Why Workers Aren’t Getting A Raise: An Economic Detective Story” (Archived). Tepper was inspired by the breakdown between leading indicators and wage growth to solve the puzzle, “why are wages growing so slowly despite a growing economy and a booming stock market?”. Though there’s a chance the trend he was analyzing may be changing, he covers everything from union participation to industrial concentration. Tepper’s analysis is worth a read.