Morning Must-Read: Tim Duy: Is There a Wage Growth Puzzle?

Justin Wolfers presumably believes that starting in 1985 expectations and perceptions of inflation anchored themselves at “low”, and that since then we have 29 years of macroeconomic experience of cyclical patterns of wage growth and unemployment in an environment with low and stable inflation and low and anchored inflation expectations. Against that yardstick the “swirlogram” that Justin sees is evidence of a “wage growth puzzle”. Tim Duy, by contrast, expects such “swirlograms”:

Tim Duy: Is There a Wage Growth Puzzle?: “Let’s see what the 1980-85 episode looks like….

..It would appear that in the face of severe contractions… wage adjustment is slow. Now consider the 1985-1990 period… wage growth is stagnant until unemployment moves below 6%…. Thus, it is premature to believe that there has been a breakdown in this relationship. So far, the response of wages is exactly what you should have expected in light of the 1980’s dynamics…. Notice the minor “swirlogram” associated with the early-90’s recession. Again, not a breakdown…. After 1992, wage growth tends to move sideways until unemployment sinks below 6%…. Oh–and real wage growth has reverted to the pre-Great Recession trend–pretty much exactly where you would expect it to be given the level of unemployment. Honestly, this one surprised me. Which suggests that labor market healing has progressed much further than many progressives would like to admit. Many conservatives as well…. Bottom Line: Be cautious in assuming that this time is different. The unemployment and wage growth dynamics to date are actually very similar to what we have seen in the past. Low wage growth to date is not the ‘smoking gun’ of proof of the importance of underemployment measures. There very well may have been much more labor market healing that many are willing to accept, even many FOMC members. The implications for monetary policy are straightforward–it suggests the risk leans toward tighter than anticipated policy.