Must-Read: Josh Bivens: A Vital Dashboard Indicator For Monetary Policy: Nominal Wage Targets

Must-Read: Josh Bivens: A Vital Dashboard Indicator For Monetary Policy: Nominal Wage Targets: “The fact that wage inflation, and not any quantity measure of labor market slack…

…is the most direct intermediating link between interest rate increases and lower price inflation further suggests that policymakers should focus on this link explicitly. If the trend in productivity growth is fairly stable, then fairly precise wage targets can be estimated. Specifically, for a 2 percent price inflation target, 1.5 percent trend productivity growth is consistent with nominal wage growth of 3.5 percent. Since the recovery from the Great Recession began, however, nominal wage growth has stayed well under 2.5 percent and shows few signs of accelerating. Policymakers may even want to allow real… wage growth to exceed productivity growth for an extended, albeit temporary, period to allow normalization of the labor share of income…. A period of real wage growth exceeding productivity growth is actually a normal phase of recovery…