EUR 217.56 For Business Accounts Only

Phillips Curve & the Dynamism of the Labor Market

We heard several times this week the assertion that wage increases have been significantly less than one would expect given the state of the labor market, which may point to more slack in the economy. To capture economic behavior and remove the arithmetic effect of aging, we look at the Atlanta Fed’s wage tracker for prime-age (25-54) individuals, which increased 3.7% in October. We go back to the roots of the Phillips Curve, which was a reduced-form model of labor supply and labor demand, and find that for the last 20 years a remarkably stable 1960s-style Phillips Curve has emerged. The unemployment rate for the prime-age cohort explains the rate of wage increases very well. Only recently has there been a very modest over-prediction of the wage increases, which we find might be correlated to more sluggish business dynamics. We look at quits behavior in relation to the unemployment rate and find that there might be a slightly lower propensity to quit, which could point to more risk-averse behavior, but the effect is small.
We run a simulation with the overall unemployment rate falling to 3.8% by the middle of next year. In this scenario, we would predict the Atlanta Fed prime-age wage tracker rising from 3.7% to 4.9% at the end of this year. On such an increase, we would expect average hourly earnings growth of 3¼% - 3½%. We think the claim that wage increases have been far lower than should be expected to be false—and we support this view without reference to the low inflation rate and the sluggish productivity growth rate.