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Wages and Labor Market Slack: Making the Dual Mandate Operational (DRAFT)

Author

Listed:
  • David G. Blanchflower

    (Peterson Institute for International Economics)

  • Adam S. Posen

    (Peterson Institute for International Economics)

Abstract

The new chair of the Federal Reserve, Janet Yellen, contends that there is considerable slack in the labor market, and that the Fed is monitoring several measures of labor market conditions to assess that problem. This Policy Brief provides new analysis on one of these measures, the US labor force participation rate. It questions the view that much of the decline is structural in nature, attributable to demographic factors. Underemployment—the phenomenon of workers wanting to work more hours but who are unable to do so—has also kept wages down. The implication for Federal Reserve policy is that low labor participation provides an additional measure of labor market slack, and that a substantial portion of US workers inactive in the labor market should not be treated as gone forever, but should be expected to spring back into the labor market if demand rises to create jobs. The Fed should be trying to address this issue along with trying to stabilize prices.

Suggested Citation

  • David G. Blanchflower & Adam S. Posen, 2014. "Wages and Labor Market Slack: Making the Dual Mandate Operational (DRAFT)," Policy Briefs PB14-10, Peterson Institute for International Economics.
    • Handle: RePEc:iie:pbrief:pb14-10
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    File URL: https://www.piie.com/publications/policy-briefs/wages-and-labor-market-slack-making-dual-mandate-operational-draft
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    Cited by:

    1. Niesr, 2021. "Appendix," National Institute UK Economic Outlook, National Institute of Economic and Social Research, issue 3, pages 51-59.
    2. Chadha, Jagjit S., 2023. "Foreward," National Institute UK Economic Outlook, National Institute of Economic and Social Research, issue 11, pages 3-4.
    3. Xie, Taojun & Liu, Jingting & Alba, Joseph D. & Chia, Wai-Mun, 2017. "Does wage-inflation targeting complement foreign exchange intervention? An evaluation of a multi-target, two-instrument monetary policy framework," Economic Modelling, Elsevier, vol. 62(C), pages 68-81.
    4. David N. F. Bell & David G. Blanchflower, 2014. "Labor Market Slack in the United Kingdom," Working Paper Series WP14-2, Peterson Institute for International Economics.
    5. Bobeica, Elena & Koester, Gerrit & Lis, Eliza & Nickel, Christiane & Porqueddu, Mario, 2019. "Understanding low wage growth in the euro area and European countries," Occasional Paper Series 232, European Central Bank.
    6. Bhattacharjee, Arnab & Lisauskaite, Elena & Pabst, Adrian & Tzendrei, Tibor, 2021. "UK Regional Outlook," National Institute UK Economic Outlook, National Institute of Economic and Social Research, issue 3, pages 37-50.
    7. Niesr, 2021. "Overview," National Institute UK Economic Outlook, National Institute of Economic and Social Research, issue 3, pages 5-36.
    8. Donayre, Luiggi & Panovska, Irina, 2018. "U.S. wage growth and nonlinearities: The roles of inflation and unemployment," Economic Modelling, Elsevier, vol. 68(C), pages 273-292.
    9. Levin, Andrew T., 2014. "The design and communication of systematic monetary policy strategies," Journal of Economic Dynamics and Control, Elsevier, vol. 49(C), pages 52-69.
    10. Josh Bivens, 2014. "Tightening Monetary Policy Now Is a Bad Mistake," Challenge, Taylor & Francis Journals, vol. 57(6), pages 5-22.
    11. Donayre, Luiggi & Panovska, Irina, 2016. "Nonlinearities in the U.S. wage Phillips curve," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 19-43.
    12. Mr. Gee Hee Hong & Zsoka Koczan & Weicheng Lian & Mr. Malhar S Nabar, 2018. "More Slack than Meets the Eye? Recent Wage Dynamics in Advanced Economies," IMF Working Papers 2018/050, International Monetary Fund.

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