Tags: Financial Times | Wage | Inflation | Economy

Financial Times: The Surprise of US Wage Inflation May Raise Its Head

By    |   Monday, 21 April 2014 12:57 PM

Wage inflation could soon surge in the United States because short-term unemployment is almost back at normal levels, and that could present the Federal Reserve with a fresh dilemma, according to the Financial Times.

That’s because if wage hikes do gain momentum, it could undercut the Fed’s key hope of keeping interest rates low at least until 2015.

“If such wage pressures start to show up this year, they could force the Fed to consider earlier interest rates rises even while the unemployment rate remains relatively high,” the Times concluded.

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While Fed Chair Janet Yellen clings to the notion that long-term unemployment will work to keep a lid on wage inflation, the Times noted that some important economists, including Alan Krueger, former chairman of President Barack Obama’s council of economic advisers, disagree.

Conventional theory holds that the lowest jobless rate an economy can sustain before wage inflation takes hold is 5 percent to 5.6 percent. While the current full rate of 6.7 percent is comfortably ahead of that range, the Times suggested that cushion is due mostly to the long-term unemployed who exert no pressure on wages.

The short-term unemployment rate of 4.3 percent is approximately back to its long-run average, the newspaper noted.

Krueger said in a paper the long-term unemployed can be discounted from wage pressure analysis because they have often given up looking seriously for work, and employers discriminate against them.

“We tentatively conclude that the long-term unemployed exert relatively little pressure on the economy,” he wrote.

In other research, economists Robert Gordon of Northwestern University and Mark Watson of Princeton agreed that not all unemployment is equal. They found inflation forecasts become more accurate when they exclude the long-term unemployed from the results, the Times said.

The Washington Post reported that the long-term unemployed face additional obstacles. Those obstacles may also be factors that could keep them from impacting wage inflation.

The Post said new research shows the long-term jobless often have trouble keeping jobs even after they finally find work again.

Some of them may have had their job skills deteriorate in the interim, and others may have been forced by circumstances or desperation to take jobs that were unsuitable for them, the Post reported.

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Wage inflation could soon surge in the U.S. because short-term unemployment is almost back at normal levels, and that could present the Federal Reserve with a fresh dilemma, according to the Financial Times.
Financial Times, Wage, Inflation, Economy
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2014-57-21
Monday, 21 April 2014 12:57 PM
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