Higher wages are a problem, some believe

Richard Fisher, president of the Dallas Federal Reserve, noted on Monday that skilled and even semiskilled workers seem to be in increasingly short supply throughout the country, pushing up U.S. wages. Fisher is among those who seem to think this is a problem. He sees a worrisome link between more jobs, higher pay and rising inflation. But what's the problem, asks Investor's Business Daily (IBD)?

Fisher's remarks stem from a common notion that the economy basically has just two buttons, which the Fed must push to come up with the perfect mix.

One button is called "jobs," the other, "inflation."

When one goes up, the idea goes, so must the other.

This idea – called the Phillips curve in economics – has entrenched itself at the Fed, in academia and on Wall Street.

For six years now, there have been non-stop complaints about the middle class being "squeezed" or unable to "keep up." Now that such workers are getting some long-overdue raises, it becomes a "problem," says IBD. Let's look at the reality:

The jobless rate is now 4.4 per cent, about a 5 1/2-year low.

Yet in October, core producer prices posted their biggest monthly drop in 13 years.

And they rose just 0.6 per cent from a year earlier, the smallest gain in three years.

Longer term, total compensation – wages, salaries and benefits – have jumped 29.9 per cent since 1999.

Core inflation is up 14.3 per cent.

That's called an improved standard of living, not inflation, says IBD.

As such, it's pretty clear the Phillips curve is defunct. In recent years, some have tried to revive it using various statistical tricks. Inflation and employment have a tenuous link at best, says IBD.

Source: Editorial, Higher Wages Are...A Problem, Investor's Business Daily, November 15, 2006.

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FMF Policy Bulletin/ 21 November 2006