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To rather miss the point, we can, and have, shift the Phillips Curve

Summary:
It's entirely true that unemployment has to be very much lower today than it was in the 70s and 80s for real wages to start to rise. This is an odd thing to complain about though, this has been the point of the labour market reforms we've carried out these recent decades. But still, Thomas Frank wants to complain:According to Josh Bivens, of Washington’s Economic Policy Institute, you can trace the slow decline of US workers’ bargaining power in the historical statistics. As the years go by, it requires ever lower levels of unemployment to ignite the wage growth that was once the hallmark of good times. “The decades-long campaign by employers to kick away any sources of economic leverage enjoyed by typical workers seems to have worked,” he tells me. “These workers now get real wage increases only during white-hot labour markets.”This is the central story of the last four decades, the vast social engineering project to which all our recent presidents and both parties have contributed. Next to this stupendous transformation, all the culture wars and flag-fights and stupid tweets fade into insignificance.Vast social engineering might be overdoing it but yes, a bipartisan attempt to reform this part of the economy.The why being that it is better for us all if this is so. Think about the business cycle for a moment.

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It's entirely true that unemployment has to be very much lower today than it was in the 70s and 80s for real wages to start to rise. This is an odd thing to complain about though, this has been the point of the labour market reforms we've carried out these recent decades. But still, Thomas Frank wants to complain:

According to Josh Bivens, of Washington’s Economic Policy Institute, you can trace the slow decline of US workers’ bargaining power in the historical statistics. As the years go by, it requires ever lower levels of unemployment to ignite the wage growth that was once the hallmark of good times. “The decades-long campaign by employers to kick away any sources of economic leverage enjoyed by typical workers seems to have worked,” he tells me. “These workers now get real wage increases only during white-hot labour markets.”

This is the central story of the last four decades, the vast social engineering project to which all our recent presidents and both parties have contributed. Next to this stupendous transformation, all the culture wars and flag-fights and stupid tweets fade into insignificance.

Vast social engineering might be overdoing it but yes, a bipartisan attempt to reform this part of the economy.

The why being that it is better for us all if this is so. Think about the business cycle for a moment. We have a boom, growth occurs, then inflation rears its head and we've got to slam on the brakes with an interest rate rise - what we might call an engineered recession. The faster the wages rises occur in said boom the faster we've got to slam on the brakes. So, change the manner in which those wage rises occur and we can let the boom run for longer.

Another way to put this is that Phillips Curve. The point being that we don't have to run along it, or only do so. We can also shift it by changing the underlying microeconomics of the labour market. So, we did.

The reason we did was because people noted that we had a ratchet effect going on. The unemployment level at which we had to raise interest rates kept rising every boom. The unemployment in each recession was higher again - and higher again every recession. We were ending up with an ever more significant portion of the population entirely locked out of the world of work - and the independence, self worth and income that goes with it.  

Thus, change the labour market so as to stop that portion being entirely locked out. The flip side of this is that wages rise only at ever lower levels of unemployment. Actually, the very thing we've been trying to engineer.

Frank is right in that this was planned of course. It's the basis of much of the work of Richard Layard for example. Dean Baker, Paul Krugman and Brad Delong have all been arguing that the Federal Reserve should delay raising interest rates precisely because this change has occurred, we're still not at that non-accelerating inflation rate of unemployment. But to complain about it does seem most odd. The aim has all along been to make sure that we don't have swathes of the population rotting away in permanent unemployment. Something we've achieved and now he's complaining? 

Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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