The death of the Phillips Curve is the time to lift up new economic indicators
The U.S. Federal Reserve Board’s “dual mandate” of achieving maximum employment and stable prices is based on an economic rule of thumb known as the Phillips Curve. First postulated in 1958 and named after New Zealand economist William Phillips, the Phillips Curve proposes an inverse relationship between unemployment and inflation—when unemployment drops, inflation generally rises. The thinking behind the curve is that when employment rates are high, employers have to compete for workers, which drives wages up.
But at a congressional monetary policy oversight hearing this past July, Federal Reserve Chairman Jerome Powell made a striking pronouncement: The Phillips Curve is dead.
Why? Consider first the Phillips Curve and the current U.S. labor market. The monthly jobs report from the U.S. Bureau of Labor Statistics shows that the unemployment rate has hovered around a historically low level, between 3.6 percent and 4 percent, for 16 months amid the longest expansion of monthly employment growth on record. But counter to the predictions of the Phillips Curve, these positive top-line numbers have not translated into gains for most U.S. workers. Wage growth remains sluggish and inflation is low. Although he isn’t the first to notice this, Chairman Powell’s testimony added credibility to the idea that the inverse relationship between unemployment and inflation “was a strong one 50 years ago” but now “has gone away.”
The Philips Curve has broken down for many of the same reasons the U.S. economy has seen a dramatic increase in income inequality. Workers simply don’t have the bargaining power to translate increased demand for their labor into higher wages. The demise of unions and the rise of monopsony markets, where people only have the choice to work for a small number of employers, have devastated the bargaining position of workers.
Addressing inequality and the collapse of worker power will require a new analytic lens. The economy of 50 years ago produced prosperity broadly, making one-number statistics useful summaries of economic progress. But now, economic policymaking institutions should embrace economic indicators that shed light on our new, unequal economy. Pivoting to measures of economic progress that are broken down by level of income, race, or gender will provide a better picture of how all U.S. workers and their families are faring.
The economics profession has already realized this and begun filling in the gaps. Economist Xavier Jaravel at the London School of Economics found, in an analysis of price-scanner data, that low-income and middle-income U.S. households actually face higher rates of inflation than the richest households. A new Federal Reserve analysis of how wealth is distributed in the United States shows that since 1989, the wealthiest 1 percent of households have seen their fortunes rise by 600 percent in nominal terms, while the bottom 50 percent have seen just a 60 percent increase.
Emmanuel Saez and Gabriel Zucman at the University of California, Berkeley and Thomas Piketty at the Paris School of Economics have proposed reforming how we measure Gross Domestic Product, requiring growth to be reported by income bracket instead of as a single number. Their research shows that since 1980, 65 percent of all U.S. GDP growth has accrued to just 10 percent of the population. The Measuring Real Income Growth Act, championed by Sen. Chuck Schumer (D-NY), Sen. Martin Heinrich (D-NM), and Rep. Carolyn Maloney (D-NY) would make these distributional measures of growth a standard part of our national accounts reporting.
In addition to breaking economic metrics down by income, there is much to be learned by disaggregating data by race and gender. The Phillips Curve obscures underlying heterogeneity in the U.S. economy. “Low unemployment,” for example, is and has been a matter of perception. According to the Bureau of Labor Statistics Employment Situation Report, African American workers generally face double the unemployment rate of white workers. And even periods of strong wage growth have failed to alleviate pay gaps between men and women and white and nonwhite workers, including African Americans and Latinos, who continue to earn significantly less than white men.
The demise of the Philips Curve provides an opportunity to rethink the outdated economic precepts left over from a bygone era. To accurately measure how the great diversity of U.S. families are faring economically, Chairman Powell and others should consider metrics that reflect the economy we actually live in today: one stratified by income level, race, and gender.