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Monetary Policy in US – The Pent-Up Wage Deflation hypothesis

Yellen, speaking at the Fed’s annual symposium in Jackson Hole, Wyoming, last week, again cited low wage growth as evidence that the labor market is weaker than the 6.2 percent unemployment rate suggests and that interest rates should therefore stay low. And then she proceeded to cite reasons to be wary of that proposition.Yellen

Among them is a phenomenon dubbed “pent-up wage deflation” by researchers at the San Francisco Fed. During the recession and after, employers seeking to maintain employee morale refrained from cutting pay. That left wages higher than they normally would be after a severe downturn. As a result, employers now may not have to offer increases to attract workers as the job market improves, according to San Francisco Fed economist Mary Daly.

“We didn’t get wage deflation in the recession, and we are not going to get the gradual pickup in wage inflation as the unemployment rate comes down,” said Daly, who co-wrote a paper on the subject with her San Francisco Fed colleague Bart Hobijn. Instead, wage growth may stay low for a time, then pick up suddenly once the economy reaches full employment.

Chosen excerpts by Job Market Monitor. Read the whole story at Yellen’s View on Slack Labor Market Muddied by Pent-Up Wage Deflation – Bloomberg.

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