Low Unemployment Raises an Old Inflation Debate
Should the Fed keep hiking rates in the face of a tighter labor market?
Remember NAIRU? Sounds just like “Nehru,” but it’s not one of those collarless jackets popular in the 1960s. NAIRU is the acronym for Non-Accelerating Inflation Rate of Unemployment, the clunkiest phrase economists ever devised. It was last heard amid the inflation debate in the late ‘90s. In plain English, NAIRU is the lowest the unemployment rate can go without generating a sustained pickup in inflation. On the heels of the strong January employment data, the debate now begins anew: When should policymakers and investors start to worry about the inflation implications of tight labor markets?
Vigorous job growth, including 687,000 new payroll slots in just the past three months, pushed the jobless rate down to a 41/2-year low of 4.7% last month. Hourly pay of production workers, up 3.3% from a year ago, is rising at the fastest pace in nearly three years. And job growth is generating plenty of income to support consumer spending, which is a key reason for the economy’s forward thrust in early 2006. This momentum will only tighten the labor markets further.
At the end of last year, the Federal Reserve first voiced its concern that “possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures. “ That’s Fedspeak for “if the labor markets get too tight, we might take the policy past the neutral zone into an area that actually restricts economic activity.” Back then, the unemployment rate was 5%, job growth was hobbled by the hurricanes, and the economy appeared to be slowing down. Now the landscape is starting to look less inflation-friendly.
As was clear in the late ‘90s, the importance of NAIRU is more theoretical than practical, because the rate is a moving target, shifting from business cycle to business cycle with the changing structure of the economy. Recall that, by 2000, the jobless rate had dipped a tick below 4% with little evidence that inflation pressures were building in any big way.
However, 2006 may well be different from the late 1990s, because the unemployment rate may not have as much room to fall as it did back then. Inflation in the late ‘90s was restrained by several forces. Fed policy was already in the restrictive zone, based on the Fed’s inflation-adjusted policy, even before the Fed began to tighten in 1999. A global production capacity glut following the Asian crisis in 1997 sent deflationary waves rippling through the world economy. The dollar was soaring, holding down import prices. And productivity growth was accelerating as new technology blossomed.
In 2006, Fed policy is only neutral, and it has been exceptionally loose for four years. Global competition still is clealy anti-inflationary, but domestic demand in global economies is either strong, as in China and the rest of Asia, or improving, as in Japan and the euro zone. The broad trade-weighted dollar has fallen 15% from its peak in early 2002, with further declines likely this year. And importantly, productivity growth is now slowing. In recent years companies have been exceptionally hesitant to invest and hire amid the uncertainties of corporate scandals, war, and energy shock. Businesses have satisfied demand with their existing facilities and payrolls. That reluctance temporarily boosted productivity.
But corporations have taken their shiort-term efficiency gain about as far as they can. With demand still strong, the recent robust job gains suggest that companies are ready to rely more on additional workers and less on greater productivity to meet their growth in production. That pattern doesn’t rebut the improved long-term outlook for productivity growth, but in the short term, it is a typical trend as an economic expansion matures. It just took a little longer for it to show up this time.
The inflation concern is that productivity is slowing at a time when wage growth is picking up. That’s a recipe for faster increases in unit labor costs, which correlate with inflation outside of energy and food.
The other side of stronger job markets is the support they are providing consumer confidence and spending. Little wonder why January consumer confidence hit a 31/2-year high: over the past year, monthly job growth has averaged about 175,000 slots per month. As a result, the unemployment rate has declined by half a percentage point. If job growth continues at that rate, and the extremely low level of new unemployment claims heading into February suggests that it will, then the jobless rate could be below 4.5% by summer.
So, while the key NAIRU level remains fuzzy, what’s clear is that the economy moved a lot nearer to it in January than anyone expected it to jnly a few months ago, and that marker will get even closer in the coming months.
Business Week, 2006
Notes
- that’s a Fedspeak for –что на языке ФРС означает…
- inflation outside of energy and food =“core inflation”, т.е. “базовая инфляция”: изменение цен за вычетом сезонных колебаний цен на продовольствие и энергоносители
Vocabulary
to generate a pickup in inflation –вызвать рост инфляции; inflation implications – последствия (роста) инфляции
tight labor market – сокращение рынка рабочей силы; сокращение предложения на рынке рабочей силы; to tighten the labor market – вызвать сокращение предложения на рынке рабочей силы; tight Fed policy – жесткая денежно-кредитная политика (политика повышения процентных ставок); loose Fed policy – либеральная денежно-кредитная политика (политика снижения процентных ставок)
payroll slots = jobs
resource utilization – использование ресурсов
production capacity glut – излишек производственных мощностей
elevated prices – выросшие цены
to restrict economic activity – вызвать замедление экономической активности; сдерживать экономическую активность
trade-weighted dollar – курс доллара, взвешенный относительно корзины валют основных торговых партнеров в соответствии с их удельным весом в торговле
business facilities – производственные мощности предприятий
unit labor costs – издержки на оплату труда в пересчете на единицу продукции
monthly job growth – ежемесячный рост количества рабочих мест
Exercises
- Answer the following questions:
1. What does NAIRU stand for?
2. What does the term “tight labor market” mean?
3. What is the Federal Reserve? What is its main function?
4. What’s the name of the Fed policy? What’s its Russian equivalent?
5. Why may 2006 be different from the late ‘90s? Expand on it.
- Paraphrase the following:
the clunkiest phrase economists ever devised; inflation implications; new payroll slots; hourly pay; economy’s forward thrust; elevated energy prices; job growth was hobbled by hurricanes; a moving target; the jobless rate dipped; in the late ‘90s; Fed began totighten; production capacity glut; the Fed voiced its concerns; consumer confidence; companies have been exceptionally hesitant to invest and hire.
- Give the antonyms to the following:
to tighten (the policy); jobless rate; dipped; inflation; to soar; to accelerate; domestic demand; peak; strong demand; economic expansion; the growth is picking up; to decline; fuzzy; to hike rates; to hire; vigorous growth.
- Pay special attention to translation of the underlined phrases:
1. With demand still strong, the recent robust job gains suggest…(Krasnov § 14)
2. The trade-weighted dollar has fallen 15% from its peak in 2002, with further declines likely this year.
3. That’s a recipe for faster increases in unit labor costs. (Kr. § 6)
4. Should the Fed keep hiking rates in the face of a tighter labor market?
5. They rely less on greater productivity.
6. The other side of stronger job markets.
7. The jobless rate had dipped below 4% with little evidence that inflation pressures were building. (Kr. ex.5 page 58)
8. Little wonder why January consumer confidence hit a 3.5-year high.
Relative economic performance
Les miserables
Is the economy in a better or worse state than ten years ago? The "misery index" (the sum of unemployment and inflation rates) is a back-of-the-envelope gauge of economic health. The higher the score, the greater the economic misery. It was invented by Arthur Okun, an American economist, just after the first oil crisis of the 1970s caused a sharp rise in both unemployment and inflation. Jimmy Carter popularized the misery index during his successful presidential campaign in 1976.
The classic misery index makes America's economy look pretty good, compared both with the past few decades and with much of Europe, burdened by higher jobless rates. But like many people when they hit 30, the index may be due for a spruce-up.
Merrill Lynch's economists have come up with a broader, international index. In addition to unemployment and inflation, it also adds interest rates and the budget and current- account balances, but then subtracts GDP growth (a good thing). In other words, the index not only reflects how cheery an economy feels today, but, by including budget and external balances, it also captures the ability of a country to sustain its merriment. For example, a large budget deficit probably implies higher taxes in future.
This new index could wipe the smile off the faces of exuberant Americans. The United States has the highest score, i.e, it has the most wretched economy among the big G7 countries, thanks to its huge deficits. In the 1990s, by contrast, before its imbalances exploded, its index was one of the lowest. The United States is the only country to have seen a large increase in its misery index over the past decade. Virtually all the other G7 countries - including Europe - have seen sizeable improvements.
Japan, after a decade of woe, is now back to where it was in 1994. However, Japan's misery index is somewhat misleading, since, in effect, it treats deflation as good, not bad.
The superstar that deserves to smile is Canada. Over the past decade it has seen the biggest reduction in its misery index of any G7 economy. It is the only country running both current-account and budget surpluses - in happy contrast to its southern neighbour.
The Economist, 2006
Notes
- misery index– индекс неблагополучия, невзгод: комбинирует показатели безработицы и инфляции, отражает степень уверенности потребителей в будущем и вляет на спрос
2. back-of-the-envelope gauge – оценка, не требующая сложныз расчетов
3. merriment– зд. рост экономики и связянное с ним благосостояние общества
4. exuberant –spending too much, beyond one’s means
Vocabulary
the misery index –индекс неблагополучия; an increase in misery index - рост индекса неблагополучия
gauge of economic health –оценка состояния экономики
to run a surplus (a deficit) – иметь профицит бюджета или положительное сальдо (дефицит) торгового баланса
Exercises
1. Explain or paraphrase the following:
a back-of-the-envelope gauge; the economic misery; the index may be due for a spruce-up; economists have come up with a broader index; cheery economy; the ability of a country to sustain its merriment; exuberant Americans; the most wretched economy.
2. Find in the text equivalents to the following:
приктически все остальные страны “большой семерки”; люди, достигшие 30-летнего возраста; (страна) обремененная более высоким уровнем безработицы; индекс вводит в заблуждение; (индекс) способен отразить иозможность дальнейшего процветания страны; экономисты предложили международный индекс, включающий дополнительные данные; из-за огромного дефицита.