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Wages and Labor Market Slack: Making the Dual Mandate Operational

Author

Listed:
  • David G. Blanchflower

    (Peterson Institute for International Economics)

  • Adam S. Posen

    (Peterson Institute for International Economics)

Abstract

In this paper we examine the impact of rises in inactivity on wages in the US economy and find evidence of a statistically significant negative effect. These nonparticipants exert additional downward pressure on wages over and above the impact of the unemployment rate itself. This pattern holds across recent decades in the US data, and the relationship strengthens in recent years when variation in participation increases. We also examine the impact of long-term unemployment on wages and find it has no different effect from that of short-term unemployment. Our analysis provides strong empirical support, we argue, for the assessment that continuing labor market slack is a key reason for the persistent shortfall in inflation relative to the Federal Open Market Committee’s (FOMC) 2 percent inflation goal. Further, we suggest our results point towards using wage inflation as an additional intermediate target for monetary policy by the FOMC.

Suggested Citation

  • David G. Blanchflower & Adam S. Posen, 2014. "Wages and Labor Market Slack: Making the Dual Mandate Operational," Working Paper Series WP14-6, Peterson Institute for International Economics.
    • Handle: RePEc:iie:wpaper:wp14-6
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Wages and Labor Market Slack: Making the Dual Mandate Operational
      by maximorossi in NEP-LTV blog on 2016-08-30 19:54:52

    Citations

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    Cited by:

    1. 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.
    2. 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.
    3. Nickel, Christiane & Bobeica, Elena & Koester, Gerrit & Lis, Eliza & Porqueddu, Mario, 2019. "Understanding low wage growth in the euro area and European countries," Occasional Paper Series 232, European Central Bank.
    4. 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.
    5. Josh Bivens, 2014. "Tightening Monetary Policy Now Is a Bad Mistake," Challenge, Taylor & Francis Journals, vol. 57(6), pages 5-22.
    6. Gee Hee Hong & Zsoka Koczan & Weicheng Lian & Malhar S Nabar, 2018. "More Slack than Meets the Eye? Recent Wage Dynamics in Advanced Economies," IMF Working Papers 2018/050, International Monetary Fund.

    More about this item

    Keywords

    unemployment; wages; inactivity; monetary policy; spare capacity; labor market;
    All these keywords.

    JEL classification:

    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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