Why Wages Are So Weak – A Thought Experiment

A thought experiment on why wages are so weak

I propose a microeconomic rationale for why macro wage performance is so weak, despite tight labor markets. The idea is that we are getting paid less for our job-specific knowledge because technology is making it easier to replace us without major loss of productivity with less skilled workers. The implications for markets:

  • Flattish Phillips curve and low wage inflation continue for an indefinite period
  • Living standards may increase because of lower price relative to wages, not higher wages relative to prices
  • Monetary policy will have to get on with dealing with a low inflation economy — this means setting aside obsessions about balance sheet reduction and setting up the facility to use fiscal policy as needed when the zero bound is approached
  • It’s relatively positive for equities in innovating sectors
  • Long-term bond yields will be driven by monetary policy fears, not long-term inflation worries
  • Short-term policy rate moved will be capped by the sensitivity of the economy to interest rates which may not be large. Note that this cuts both ways –both tightening and easing may be ineffective.

…continue reading



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