US wage growth lags as Fed pushes markets to bubble extremes

Improvement in the labour market will be a key factor in determining when central banks remove monetary stimulus.

In reporting some of the developments at the central banks conference at Jackson Hole, Wyoming, Bloomberg highlights the importance of the labour market in determining central banks' monetary policy decisions.

Global central bankers led by Federal Reserve Chair Janet Yellen said labor markets still have further to heal before their economies can weather higher interest rates.

Even as they signaled international monetary policies are set to diverge as economic recoveries increasingly differ, officials meeting over the weekend in Jackson Hole, Wyoming, placed jobs at the center of their decision making by saying stronger hiring and wages are still needed to drive demand.

Yellen in particular still sees slack in the US labour market.

Making her debut as Fed chief at the annual central bankers’ conclave in the shadow of the Teton mountains, Yellen said while U.S. hiring has improved and the debate at the Fed is shifting toward when “we should begin dialing back our extraordinary accommodation,” there is still a “significant” underuse of the workforce, and the labor market has yet to fully recover from the worst recession since the Great Depression.

However, in his latest article, John Hussman says that full recovery of the US labour market may prove difficult because of a winner-take-all economy.

In recent years, the U.S. has experienced a collapse in labor participation and weak growth in labor compensation, coupled with an increasingly lopsided distribution of whatever benefits the recent economic recovery has generated. This...is unlikely to be improved by endless monetary “stimulus” (the targets that clearly occupy the Fed’s thinking). While our economic challenges can be largely traced to more than a decade of persistent Fed-enabled misallocation of capital, most of the costs of this misallocation have fallen on labor because of a) shifting composition of labor demand that has resulted from an increasing share of international trade with countries with heavy populations of relatively unskilled labor; and b) economic features that increasingly create a “winner-take-all” distribution of economic gains.

The uneven distribution of gains is reflected in the fact that while non-farm productivity in the US has grown at a 1.3 percent annual rate over the past five years, “real wage growth has been trapped near zero”.

Furthermore, Hussman warns that “because general prices are the denominator of real wages, faster general price inflation tends to reduce real wages in the absence of a spiral in all nominal prices where wages take the lead”.

Finally, Hussman thinks that even as Fed monetary stimulus is failing to significantly boost the fortunes of the average US worker, it is creating “financial distortion, overvaluation, and speculation that is already baked in the cake and is progressively worsening, in a manner quite similar to the 2000 and 2007 extremes”.