Let me add a footnote here regarding wage rates and the inflation outlook. Some observers have viewed robust wage growth as a cause of inflationary pressures; I do not share that view. We can have healthy wage growth without inflation as long as we see commensurate growth in labor productivity. In fact, over time, real (inflation-adjusted) compensation tracks productivity growth fairly well, though they do not move in lockstep from quarter to quarter. I would note that the rate of growth of productivity shifted higher beginning in the middle of the 1990s, and while productivity is hard to forecast, I believe that reasonably strong productivity gains will continue and will warrant reasonably strong real wage gains. What would concern me – and we have not seen this as yet – would be a persistent increase in wage growth that was not matched by a commensurate increase in productivity growth. Ultimately this would result in higher inflation.
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2 comments:
Since so many people don't make anything (except money) these days how do we measure productivity?
It is nice to see a Fed official giving even a passing nod to the reality that those at the bottom can't contribute much to wage push inflation. Do they factor in the inflation in CEO's salaries?
[PS. If you can see this than I can post again...]
The relationship works no matter how they measure real output, as long as they measure it the same way when estimating inflation as they do when they estimate productivity.
The fact that productivity gains are hard to estimate is often a silent excuse for treating it as if it is zero ... an excuse, because then a difficult measurement problem can be ignored, and a silent excuse, because its not defensible, so it wouldn't do to draw attention to the assumption by saying it out loud.
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