A few things worth linking to, about which I have little to say:
1. Martin Weale’s speech from last week, “Slack and the labour market” is excellent. Weale estimates a 1.1% shortfall in total hours worked, accounting for over- and under-employment. This translates to a 0.8% shortfall in real GDP due to labour market slack. I would like to see some serious responses to this from supply-side optimists. One possible line of inquiry is on self-employment, which Weale only addresses briefly.
2. Tony Yates has a very interesting post on “One big hubristic consultancy jargon firework display” as he describes the BoE review. Worth a read if you are interested in BoE politics, as is Tony’s blog.
3. The John Mills/Civitas “There is an alternative” paper is out, and is very strange. Mills wants to devalue the pound, and sees that being an “alternative” to “monetary policy”. He doesn’t say how we should devalue the pound, though he favourably references the Yen devaluation under Abenomics. Mills does (implicitly) want faster NGDP growth and accepts that 3% CPI is a necessary consequence, but believes none of that has anything to do with monetary (or indeed fiscal) policy. The paper also exhibits a very, very bad fetish for manufacturing. Ben Southwood already provided a very good critique of the Mills proposal last year.
The UK CPI rate is now down to 1.7% over the twelve months to February 2014, a rambling post follows. It would be easy to point to the falling CPI rate in the UK and the rising CPI rate in Japan, then point and laugh at idiotic UK politicians celebrating falling inflation… my usual cheap gags, in other words.
It’s never that simple, because we still have to care about supply and demand. There is little evidence saying that UK aggregate demand growth has slowed over the last twelve months. There is a lot of evidence that UK aggregate demand is growing faster. Therefore it is something of a challenge that the inflation rate has fallen.
It is possible to argue that holding aggregate demand growth constant the falling inflation rate is mildly positive supply-side news, and we should grasp such news with both hands. This is how 99% of newspaper commentators interpret the inflation data anyway. Keynesians will find some vindication in their view that the inflation rate is related more to the “output gap” than to AD growth, although it comes after six years of UK macro data which generally did the opposite.
Despite some crowing from Tories in the press about the imminent rise of real wages, I see absolutely no indication that hourly wage growth has picked up at all. If anything, wage growth slowed through 2013. It remains hard to get reliable high frequency nominal hourly wage data (see previous post) but I can torture the data to give you this little graph:
The data really is tortured to produce that; I take the series for Average Weekly Earnings Regular Pay and divide by average weekly hours, and then apply a 3-month moving average; using the total pay measure inclusive of bonuses produces an extremely volatile result for hourly wages. Take all this with a pinch of salt. (What do erratic City bonuses imply for stickiness of hourly wages – arguments in the comment section?)
The other supply-side indicator giving me a little doubt about demand-side revival is a slight fall in total hours worked in recent labour market updates. I have said it before, but it is hard to overstate how strong the expansion in the UK labour market has been since 2012. Over the 24 months to October 2013, total hours worked grew 5%. There is no period of employment growth this strong since the Lawson boom in the late 80s. The survey evidence for UK employment this year is looking good so there is hopefully no reason to have doubts about the labour market.
It’s the liquidity trap, stupid! Everybody knows you can’t devalue the currency at the ZLB. Everybody, that is, apart from the central banks of Switzerland, Japan, and the Czech Republic, everybody who has read about forex market gyrations after British, European or American central bankers engage in those almost daily “open mouth operations”, Lars E.O. Svensson, Ben Bernanke, students of economic history, and now Labour Party donor John Mills:
In the paper, which is due to be published this week with the think tank Civitas, Mr Mills has called for an immediate devaluation of the pound. He argues that the UK will be consigned to years of mounting debts and austerity unless manufacturing and productivity levels are boosted. As a major importer of goods, from kitchen gadgets, irons and sports bras, Mr Mills says manufacturing will only return to the UK if the costs come down. De-valuing the pound is the fastest way to achieve this. “We’ve got to get the pound down to make light manufacturing profitable,” he told The Telegraph. “At JML we would buy UK products but we can get everything we sell produced in China for two-thirds of the cost. This is almost entirely an exchange rate issue. And as a result, industrial output just goes down. We can’t pay our way in the world and the economy stagnates – that’s what we’re heading for.”
He said that UK politicians are only using two of the three major ways that a Government can influence the economy – fiscal policy, monetary policy and exchange rates. “Everyone is fixated on the first two and has totally ignored the third,” he said. “And this is the big, big policy mistake that has been made.”
It will be interesting to read the paper; the “real” policy mistake is the choice of nominal anchor, not the level of the pound per se. I hope the proposal is more substantial than a call for a “discretionary” one-off devaluation, but retention of the CPI target.
A quick note. An ONS report today on hedonic quality adjustment carries the following table showing the items for which hedonic quality adjustment is performed in the CPI basket:
Table 2: Hedonic items in the UK consumer price statistics
|PCs||1996||CPI – 2003
RPI – 2004
Source: Office for National Statistics
And that’s it! (For background on hedonic quality adjustment, the BLS has a nice FAQ.)
I was very surprised to discover that hedonics are only applied to such a small set of items. The ONS note that the US, by contrast, adjusts for items described as “Clothing, Footwear, Refrigerators, Washing Machines, Clothes Dryers, Ranges & Cooktops, Microwave Ovens, TVs, DVD Players”.
The ONS say they find hedonics complicated and expensive; for goods which are now weighted less than than 1% in the CPI basket, it’s hard not to be sympathetic:
In practice hedonics has proven to be a resource intensive process in the ONS and therefore a costly method. This is due to a number of factors, including the technical nature of the method and the large volume of price and product attribute data that needs to be collected and managed for the production of each hedonic model. Additionally, each hedonic model is updated several times a year to stay relevant to technology changes (for example the introduction of Windows 8 in 2012) which compounds the work involved.
Those who believe that “the price index” captures something real, tangible, and objectively measurable, should be wondering how it is possible to make an objective assessment of the change in PC quality taking account of the “introduction of Windows 8”!
What’s the state of UK macro according to the NIESR?
Recent GDP growth has been driven by domestic demand growth, especially consumer spending, which contributed 1.6 percentage points to growth in 2013. This has come despite further falls in real consumer wages. We expect consumer spending to remain the key driver of recovery in 2014 and 2015, supported by continued buoyancy in the housing market. House prices have seen a dramatic rise throughout the year, concentrated in London and the South East. There is considerable uncertainty over the magnitude of the impact of the second Help to Buy Scheme: stronger house price inflation would lead to even stronger consumer spending growth in 2014.
That is from last month, I quote it only because it’s typical of what City commentators are saying about UK macro. It is interesting how ZLB macro narratives change in the UK. It appears to me we have have shifted into phase three:
1) In Phase 1 it was asserted that monetary policy will have no effect at the ZLB – it’s a liquidity trap – printing money is pushing on a string. Ergo, fiscal fiscal fiscal.
2) In Phase 2 it was accepted that in fact monetary policy will have an effect, but it will “only boost asset prices”, it will not help the “real economy.” Boosting asset prices had “distributional effects” and was zero-sum: rich people owning assets gained, poor people lost out. After all, if house prices go up, housing is “less affordable”! Similarly monetary policy could obviously boost commodity prices – again a bad thing for the little people who want to consume those commodities. Phase 2 was monetary policy viewed as creating supply-side inflation. Fiscal policy, in contrast, could build real things like bridges and ergo was a better idea.
3) In Phase 3 there is a recognition that boosting asset prices does have effects on the real economy but this was probably a bad thing because it’s “unsustainable”, and it’s also due to fiscal policy in any event.
It is not obvious to me why any level of house prices would be “unsustainable” any more than any level of consumer prices would be “unsustainable”. It’s just a price index. If macroeconomists really believe that house prices are really the key (or a key?) to boosting real growth and employment – then why not have the Bank of England target the house price index?
There is nothing magical about stabilising the CPI rate, but the HPI is special…. if only we’d known this in 2010! Worried about the effects of fiscal austerity on employment? Never mind, have the Bank of England target 20% y/y house price inflation, which will boost consumption and “drive the recovery”.
I’ve been intending to trawl reports on UK youth unemployment to see how they consider the effect of the minimum wage. Since I already kicked the hornets nest I may as well now go all-in.
ACEVO describes itself as “the Association of Chief Executives of Voluntary Organisations” and “the leading voice for chief executives in the third sector”; they produced a study in 2011 named “Youth unemployment: the crisis we cannot afford” (pdf) from a commission chaired by David Miliband.
To their credit, the authors do seriously consider the effect of the minimum wage, and commissioned a short study by Jack Britton, who appears to be a postgrad at Bristol University. The study itself is delegated to an appendix, but the report says summarizes the conclusion like this:
Our analysis concludes that theories about the impact of immigration, work disincentives arising from beneﬁt rates and an overgenerous minimum wage are largely red herrings in the debate about youth unemployment.
I’ll quote a large passage from Mr. Britton’s study (pp.120 onwards) looking at how average wages moved between age groups, since it is worth reading, and I don’t want to cherry-pick:
The growth rates of the NMW are shown alongside the growth rates in overall earnings for each of the three age bands in Figure 11. The ﬁgure shows that wage growth for the three groups was very similar in both the 2004-2007 period and in the 1999-2004 period, despite the introduction of the minimum for 16-17 year olds in 2004. Because there is no unusual upward shift in wages of 16 and 17 year olds after the introduction of the NMW, it seems unlikely that the wage was set at a level that would signiﬁcantly affect employment. The same is true for 18-20 year olds; it seems unlikely that between 2004 and 2007 the minimum wage began to bite, as there is no unusual pattern in average wage growth.
However in the 2007-2010 period, the growth rates of average wages do begin to differ by age group; growth in wages amongst those aged over 21 is far higher than amongst the other two age groups. This is also reﬂected in Figures 10 and 11, which show respectively the proportion of 16-17 year olds and the proportion of 18-20 year olds in work being paid within various pay ranges. It is clear from both ﬁgures that the proportion of young people being paid the minimum wage for their respective age groups increased signiﬁcantly between 2007 and 2010. (This is shown by the increase in the size of the thick blue area in Figure 10 and the thick red area in Figure 11).
The evidence therefore suggests that companies made limited use of the NMW upon its introduction, but have started to in the wake of the 2008 recession. In other words, prior to the recession it seems the NMW was non-binding, but that it now is, or is starting to. This suggests that the NMW had a limited role in the pre-recessional rise in the NEET rate, but that it now might start to have an important inﬂuence.
That looks not unreasonable to me. But I am confused about how the report’s authors have taken a study which says the minimum wage “might start to have an important influence” since 2008, and concluded the effect of the minimum wage is “largely a red herring”. Those two phrases do not mean the same thing at all.
The second thing Mr. Britton looks at is sectoral shifts of job creation, where he says:
The table shows that the two sectors where the most jobs were created between 2004 and 2007 were the Public and the Financial Sectors. Although these sectors employ around 30% of 16-24 year olds between them, these people are typically less vulnerable to unemployment, as they are older (they employ 30% of 16-24 year olds, but only 20% of 16-21 year olds) and better qualiﬁed (the LFS data suggest 60% of people employed in these sectors have ﬁve or more GCSEs, compared to the sample average of 51%). The depression of jobs in sectors in which vulnerable young people typically work is likely to be more important; although it is difﬁcult to precisely estimate the proportion of the rise in the NEET rate since 2004, it seems that this sectoral shift is quite important; potentially contributing more than 30% of the overall rise.
Again, I am confused about how this might be interpreted as evidence that the minimum wage is “largely a red herring”. It seems to me that a “depression of jobs in sectors in which vulnerable young people typically work” would be a perfectly natural effect of raising the minimum wage for young people.
If the evidence for the absence of a link between youth unemployment and the NMW is so compelling, as many insist, I am left wondering why the ACEVO report commissioned a study which appears to provide evidence that there is such a link, and then, uh, “largely” ignores that result. My trawling will continue.
I liked the heading used in Draghi’s speech this week
Five years of monetary policy – the ECB has delivered
In the last five years, the ECB has continued to take the necessary measures with a view to maintaining price stability in the euro area.
The narrative for 2011 is fun:
Initially, while the economic impact of the sovereign debt crisis was limited and largely confined to vulnerable economies, the rapid global recovery put upside pressure on energy prices. This drove up inflation also in the euro area. We decided to raise interest rates in early 2011 given upside risks to the medium term inflation outlook stemming from energy prices and from ample monetary liquidity.
So you raised rates to fight an energy supply shock and “ample monetary liquidity”. How did that work out?
However, the sovereign debt crisis deepened and the euro area entered a second recession.
Oh. “However” is a bit out of place, don’t you think? “Naturally” would work better. We raised interest rates and naturally the Euro area then entered a second recession.
The inflationary pressures that had emerged before receded.
What a relief, bonuses all round, job well done.