The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
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November 14, 2018
Polarization through the Prism of the Wage Growth Tracker
One of the most frequent questions we receive about the Atlanta Fed's Wage Growth Tracker (the median of year-over-year percent changes in individuals' hourly wage) is about the relationship between wage level and wage growth. For example, do high-wage earners also tend to experience greater wage growth?
An earlier macroblog post explored this question. Unfortunately, answering it is not as easy as it might appear. When looking at wage growth by wage level, whether you use the prior or current wage level as the reference point matters—a lot. If we looked at wage growth categorized by the prior year's wages, we would find higher median wage growth for low-wage earners than for high-wage earners. This is because some workers who earned low wages last year earn middle or high wages this year, and some of last year's high-wage workers earn middle or low wages this year. If we instead categorized people based on current-year wages, we would see exactly the opposite: lower median wage growth for low-wage workers than for high-wage workers.
One way to lessen this wage-level base effect is to categorize an individual's wage growth according to their average wage across the two years. The following chart shows this categorization for the 2016 to 2017 wage growth distribution of all workers in the Wage Growth Tracker data. In the chart, the first quartile (labeled <$13.8) depicts the lowest-paid 25 percent of workers based on their average 2016–17 hourly wage, and so on. The center line of the box for each quartile is the median of that group's wage growth distribution, and the lower and upper boundaries of the box are the 25th and 75th percentiles, respectively. The outer lines are the thresholds for outlier observations (see here for the calculation.)
The chart shows that the wage growth distribution across the average-wage quartiles does, in fact, differ. For example, the median wage growth from 2016 to 2017 for the lowest quartile is 3.9 percent, 1.6 percent for the second quartile, 1.9 percent for the third quartile, and 3.2 percent for the top quartile.
The pattern of higher median wage growth in the lower and upper quartiles, compared with the middle part of the wage distribution, is reasonably uniform over time. However, there is a cyclical difference between the median wage growth of high- and low-wage earners. This difference is apparent in the following chart, which plots median wage growth over time for each average-wage quartile.
As the chart shows, median wage growth of low-wage workers (the green line, first quartile) currently exceeds that of high-wage workers (the blue line, fourth quartile), but it was below the median for high-wage workers in the wake of the Great Recession. This pattern is consistent with the both the severity of the recession and what we have been hearing more recently about emerging shortages of low-skilled workers. In contrast, median wage growth for workers in the middle of the wage distribution (the orange and purple lines) remains lower than for either high- or low-wage workers. Overall, these findings reinforce the idea of polarization, where the demand for workers has generally grown more in the tails of the skill/wage distribution than in the middle.
October 26, 2018
On Maximizing Employment, a Case for Caution
Over the past few months, I have been asked one question regularly: Why is the Fed removing monetary policy stimulus when there is little sign that inflation has run amok and threatens to undermine economic growth? This is a good question, and it speaks to a philosophy of how to maintain the stability of both economic performance and prices, which I view as important for the effective implementation of monetary policy.
In assessing the degree to which the Fed is achieving the congressional mandate of price stability, the Federal Open Market Committee (FOMC) identified 2 percent inflation in consumption prices as a benchmark—see here for more details. Based on currently available data, it seems that inflation is running close to this benchmark.
The Fed's other mandate from Congress is to foster maximum employment. A key metric for performance relative to that mandate is the official unemployment rate. So, when some people ask why the FOMC is reducing monetary policy stimulus in the absence of clear inflationary pressure, what they really might be thinking is, "Why doesn't the Fed just conduct monetary policy to help the unemployment rate go as low as physically possible? Isn't this by definition the representation of maximum employment?"
While this is indeed one definition of full employment, I think this is a somewhat short-sighted perspective that doesn't ultimately serve the economy and American workers well. One important reason for being skeptical of this view is our nation's past experience with "high-pressure" economic periods. High-pressure periods are typically defined as periods in which the unemployment rate falls below the so-called natural rate—using an estimate of the natural rate, such as the one produced by the Congressional Budget Office (CBO).
As the CBO defines it, the natural rate is "the unemployment rate that arises from all sources other than fluctuations in demand associated with business cycles." These "other sources" include frictions like the time it takes people to find a job or frictions that result from a mismatch between the set of skills workers currently possess and the set of skills employers want to find.
When the actual unemployment rate declines substantially below the natural rate—highlighted as the red areas in the following chart—the economy has moved into a "high-pressure period."
For the purposes of this discussion, the important thing about high-pressure economies is that, virtually without exception, they are followed by a recession. Why? Well, as I described in a recent speech:
"One view is that it is because monetary policy tends to take on a much more 'muscular' stance—some might say too muscular—at the end of these high-pressure periods to combat rising nominal pressures.
"The other alternative is that the economy destabilizes when it pushes beyond its natural potential. These high-pressure periods lead to a buildup of competitive excesses, misdirected investment, and an inefficient allocation of societal resources. A recession naturally results and is needed to undo all the inefficiencies that have built up during the high-pressure period.
"Yet, some people suggest that deliberately running these high-pressure periods can improve outcomes for workers in communities who have been less attached to the labor market, such as minorities, those with lower incomes, and those living in rural communities. These workers have long had higher unemployment rates than other workers, and they are often the last to benefit from periods of extended economic growth.
"For example, the gap between the unemployment rates of minority and white workers narrows as recoveries endure. So, the argument goes, allowing the economy to run further and longer into these red areas on the chart provides a net benefit to these under-attached communities.
"But the key question isn't whether the high-pressure economy brings new people from disadvantaged groups into the labor market. Rather, the right question is whether these benefits are durable in the face of the recession that appears to inevitably follow.
"This question was explored in a research paper by Atlanta Fed economist Julie Hotchkiss and her research colleague Robert Moore. Unfortunately, they found that while workers in these aforementioned communities tend to experience greater benefits from these high-pressure periods, the pain and dislocation associated with the aftermath of the subsequent recession is just as significant, if not more so.
"Importantly, this research tells me we ought to guard against letting the economy slip too far into these high-pressure periods that ultimately impose heavy costs on many people across the economy. Facilitating a prolonged period of low—and sustainable—unemployment rates is a far more beneficial approach."
In short, I conclude that the pain inflicted from shifting from a high-pressure to a low-pressure economy is too great, and this tells me that it is important for the Fed to beware the potential for the economy overheating.
Formulating monetary policy would all be a lot easier, of course, if we were certain about the actual natural rate of unemployment. But we are not. The CBO has an estimate—currently 4.5 percent. The FOMC produces projections, and other forecasters produce estimates of what it thinks the unemployment rate would be over the longer run.
For my part, I estimate that the natural rate is closer to 4 percent, and given the current absence of accelerating inflationary pressures, we can't completely dismiss the possibility that the natural rate is even lower. Nonetheless, with the unemployment rate currently at 3.7 percent, it seems likely that we're at least at our full employment mandate.
So, what is this policymaker to do? Back to my speech:
"My thinking will be informed by the evolution of the incoming data and from what I'm able to glean from my business contacts. And while I wrestle with that choice, one thing seems clear: there is little reason to keep our foot on the gas pedal."
October 01, 2018
Demographically Adjusting the Wage Growth Tracker
In a recent report, the Council of Economic Advisers (CEA) referred to the Atlanta Fed's Wage Growth Tracker, noting its usefulness as a people-constant measure of wage growth because it looks at the over-the-year changes in the wages for a given set of individual workers. The CEA's preferred version of the Wage Growth Tracker is the one created by my colleague Ellie Terry and described in this macroblog post. It weights the sample of individual wage growth observations so that the worker characteristics resemble the population of wage and salary earners in every month. However, the CEA report also noted that this measure does not adjust for the fact that the characteristics of wage and salary earners have changed over time.
The following table, which shows the percent of workers in different age groups for three years (in three different decades), illustrates this point. The statistics are shown for the unweighted Wage Growth Tracker sample (the green columns), and for the population of wage and salary earners (the blue columns).
Wage Growth Tracker Sample
Wage and Salary Earner Population
Source: Current Population Survey, author's calculations
The table shows that the Wage Growth Tracker sample in each year has fewer young workers (and more old workers) than does the population of all wage and salary earners, a fact for which the weighted version of the Wage Growth Tracker adjusts. However, the weighted version doesn't adjust for the fact that the workforce has also become older over time—the share of workers over 54 years old has risen nearly 11 percentage points since 1997.
Shifts in the distribution of demographic and other characteristics over time could matter for measures of wage growth because, for example, wage growth tends to be much higher for young workers. Young workers switch jobs more often, whereas workers aged 55 and older tend to have the lowest rates of job switching. Other changes in the composition of the workforce could also be important, such as changes the mix of education, the types of jobs, etc.
To investigate the impact of changes in workforce characteristics over time, we developed another version of the Wage Growth Tracker. This one weights the sample for each month so that it is more representative of the wage and salary earner population that existed in 1997. So, for instance, it always has about 15.5 percent aged 16-24, 73.3 percent aged 25-54, and 11.2 percent over 54 (the blue columns in the 1997 row of the table above).
As the following chart shows, the shifting composition of the workforce has put some additional downward pressure on median wage growth in recent years. That is, median wage growth would be even stronger if the sample each month looked more like it came from the population of wage and salary earners in 1997.
All three versions of the Wage Growth Tracker—unweighted, weighted to each month's workforce characteristics, and weighted to 1997 workforce characteristics—are available in the data download section of the Wage Growth Tracker web page. Which one you prefer depends on the question you are trying to answer. The monthly weighted version makes the Wage Growth Tracker more representative of the characteristics of the employed in each month, and in doing so gives young workers more influence, but it does not control for the fact that today's workforce has a smaller share of young workers than in the past. The 1997-weighted version fixes the workforce characteristics at their 1997 levels. It says that the median growth in individual wages would be higher than it is today if the composition of the workforce had not changed (other things equal). Nonetheless, any version of the Tracker you consult in the previous chart tells a pretty similar overall story: median wage growth is significantly higher than it was five or six years ago, but it hasn't shown much acceleration over the last couple of years.
August 23, 2018
What Does the Current Slope of the Yield Curve Tell Us?
As I make the rounds throughout the Sixth District, one of the most common questions I get these days is how Federal Open Market Committee (FOMC) participants interpret the flattening of the yield curve. I, of course, do not speak for the FOMC, but as the minutes from recent meetings indicate, the Committee has indeed spent some time discussing various views on this topic. In this blog post, I'll share some of my thoughts on the framework I use for interpreting the yield curve and what I'll be watching. Of course, these are my views alone and do not reflect the views of any other Federal Reserve official.
Many observers see a downward-sloping, or "inverted," yield curve as a reliable predictor for a recession. Chart 1 shows the yield curve's slope—specifically, the difference between the interest rates paid on 10-year and 2-year Treasury securities—is currently around 20 basis points. This is lowest spread since the last recession.
The case for worrying about yield-curve flattening is apparent in the chart. The shaded bars represent recessionary periods. Both of the last two recessions were preceded by a flat (and, for a time, inverted) 10-year/2-year spread.
As we all know, however, correlation does not imply causality. This is a particularly important point to keep in mind when discussing the yield curve. As a set of market-determined interest rates, the yield curve not only reflects market participants' views about the evolution of the economy but also their views about the FOMC's likely reaction to that evolution and uncertainty around these and other relevant factors. In other words, the yield curve represents not one signal, but several. The big question is, can we pull these signals apart to help appropriately inform the calibration of policy?
We can begin to make sense of this question by noting that Treasury yields of any given maturity can be thought of as the sum of two fundamental components:
- An expected policy rate path over that maturity: the market's best guess about the FOMC's rate path over time and in response to the evolution of the economy.
- A term premium: an adjustment (relative to the path of the policy rate) that reflects additional compensation investors receive for bearing risk related to holding longer-term bonds.
Among other things, this premium may be related to two factors: (1) uncertainty about how the economy will evolve over that maturity and how the FOMC might respond to events as they unfold and (2) the influence of supply and demand factors for U.S. Treasuries in a global market.
Let's apply this framework to the current yield curve. As several of my colleagues (including Fed governor Lael Brainard) have noted, the term premium is currently quite low. All else equal, this would result in lower long-term rates and a flatter yield curve. The term premium bears watching, but it is unclear that movements in the premium reflect particular concerns about the course of the economy.
I tend to focus on the other component: the expected path of policy. When we ask whether a flattening yield curve is a cause for concern, what we are really asking is: does the market expect an economic slowdown that will require the FOMC to reverse course and lower rates in the near future?
The eurodollar futures market shows us one measure of the market's expectation for the policy rate path. These derivative contracts are quoted in terms of a three-month rate that closely follows the FOMC's policy rate, which makes them well-suited for this kind of analysis. (Some technical details regarding this market can be found in a 2016 issue of the Atlanta Fed's "Notes from the Vault.")
Chart 2 illustrates the current estimate of the market's expected policy rate path. Read simply, the market appears to be forecasting continuing policy rate increases through 2020, and there is no evidence of a market forecast that the FOMC will need to reverse course in the medium term. However, the level of the policy rate is lower than the median of the FOMC's June Summary of Economic Projections (SEP) for 2019 and 2020.
Once we get past 2020, the market's expected policy path flattens. I read this as evidence that market participants overall expect a very gradual pace of tightening as the most likely outcome over the next two years. Interestingly, the market appears to expect a slower pace of tightening than the pace that at least some members of the FOMC currently view as "appropriate" as represented in their SEP submissions.
For this measure, I find the short-term perspective most informative. As one looks further into the future, the range of possible outcomes widens, as many the factors that influence the economy can evolve and interact widely. Thus, the precision of any signal the market is providing about policy expectations—if indeed there is any signal at all—is likely to be quite low.
With this information in mind, I do not interpret that the yield curve indicates that the market believes the evolution of the economy will cause the FOMC to lower rates in the foreseeable future. This interpretation is consistent with my own economic forecast, gleaned from macroeconomic data and a robust set of conversations with businesses both large and small. My modal outlook is for expansion to continue at an above-trend pace for the next several quarters, and I see the risks to that projection as balanced. Yes, there are downside risks, chief among them the effects of (and uncertainty about) trade policy. But those risks are countered by the potential for recent fiscal stimulus to have a much more transformative impact on the economy than I've marked into my baseline outlook.
I believe the yield curve gives us important and useful information about market participants' forecasts. But it is only one signal among many that we use for the complex task of forecasting growth in the U.S. economy. As the economy evolves, I will be assessing the response of the yield curve to incoming data and policy decisions along the lines I've laid out here, incorporating market signals along with a constellation of other information to achieve the FOMC's dual objectives of price stability and maximum employment.
- Polarization through the Prism of the Wage Growth Tracker
- On Maximizing Employment, a Case for Caution
- Demographically Adjusting the Wage Growth Tracker
- What Does the Current Slope of the Yield Curve Tell Us?
- Does Loyalty Pay Off?
- Immigration and Hispanics' Educational Attainment
- Are Tariff Worries Cutting into Business Investment?
- Improving Labor Market Fortunes for Workers with the Least Schooling
- Part-Time Workers Are Less Likely to Get a Pay Raise
- Learning about an ML-Driven Economy
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