I like the discernment in Arnold Kling's three-pronged argument according to which:
- (1) economy-wide wage growth is too highly aggregated a performance figure for analysing the economy,
- (2) the Fed is trailing the real economy,
- (3) the economy can be and presently is segmented so that certain layers of it experience vibrant economic activity, while others are mired in recession.
On (1), I would note that a few years ago wage growth was violating the Phillips Curve on the high side [meaning, I suppose: too high employment relative to the level of inflation, with strong demand for labour and correspondingly high wage growth, G.T.], and now it is violating the Phillips Curve on the low side [employment is too low given the level of inflation, with insufficient demand for labour and correspondingly weak wage growth, G.T.]. And yet mainstream macroeconomists stick to the Phillips Curve like white on rice. I would emphasize that the very concept of “the” wage rate is a snare and a delusion. Yes, the Bureau of Labor Statistics measures such a thing.
Instead, think of our economy as consisting of multiple labor market segments, not tightly connected to one another. There are many different types of workers and many different types of jobs, and the mix keeps shifting. I would bet that in recent years the official statistics on “the” wage rate have been affected more by mix shifts than by a systematic relationship between “the” wage rate and “the” unemployment rate.
On (2), I view this as evidence for my minority view that the Fed is not a big factor in the bond market. Instead, the Fed is mostly just following the bond markets. When it actually tries to affect the bond market, what you get are “anomalies,” i.e., the failure of the bond market to do as expected by the Fed.
On (3), I think that we are seeing a Charles Murray economy. In Murray’s Belmont, where the affluent, high-skilled workers live, I am hearing stories of young people quitting jobs for better jobs. On the basis of anecdotes, I would say that for young graduates of top-200 colleges, the recession is finally over. The machinery of finding sustainable patterns of specialization and trade is finally cranking again.
In Murray’s Fishtown, on the other hand, the recession is not over. I would suggest that we are seeing the cumulative effects of regulations, taxes, and means-tested benefits that reduce the incentive for firms to hire low-skilled workers as well as the incentive for those workers to take jobs. As Sumner points out, President Obama’s policies have moved in the direction of making these incentives worse.
Read the whole post on Arnold Kling's theory of the segmented wealth of nations.
For a broader context of Kling's take, consider his intriguing account of contemporary economic change:
I am inclined to treat the financial crisis as a blip, one whose apparent macroeconomic impact was made somewhat worse by the very policies that mainstream economists claim were successful.
This blip took place in the context of key multi-decade trends:
–the transition away from goods-producing sectors and toward the New Commanding Heights of education and health care
–the transition of successful men away from marrying housekeepers and toward marrying successful women
–the integration of workers in other nations, most notably China and India, into the U.S. production system
–the increasing power of computer technology that is more complementary to some workers than others
These trends are what explain the patterns of employment and relative wages that we observe. The financial crisis, and the government panic in response, pushed the impact of some of these developments forward in time.