Will wages start rising soon?

The short-term unemployment rate, which some observers say is a better predictor of wage growth, has already recovered to pre-crisis levels.

By MSN Money Partner Feb 12, 2014 3:57PM
Image: Grocery clerk (© Corbis/SuperStock)By Matthew Boesler, Business Insider

According to a new study conducted by M. Henry Linder, Richard Peach, and Robert Rich, researchers at the New York Fed, the short-term unemployment rate is a better predictor of wage growth than the headline unemployment rate.

The short-term unemployment rate has already recovered to pre-crisis averages. While the long-term unemployment rate has fallen as well, it remains significantly elevated from pre-crisis averages.

Janet Yellen honed in on long-term unemployment recently in her first Congressional testimony as chairman of the Federal Reserve, suggesting that it may be a source of slack in the labor market that is not captured by the headline unemployment rate, and is therefore worth watching closely.

This reasoning is at the core of the Fed's insistence on continuing its campaign of extraordinary monetary stimulus by keeping short-term interest rates pinned at ultra-low levels until sometime next year, or perhaps even longer.

However, the findings of Linder, Peach, and Rich, posted on the New York Fed's website, suggest that this may be a dangerous approach.

The researchers construct two forecasts of wage growth -- one that uses short-term unemployment as an input, and another using total unemployment. They find that since the recession, the forecast using short-term unemployment has been closer to actual wage growth than the other, as can be seen in the next chart.

Because total unemployment is just long-term unemployment plus short-term unemployment, the implication of these findings is that the focus on long-term unemployment may cause the Fed and others to underestimate wage growth.

One reason why there is so much confusion about this is the experience of long-term unemployed in the wake of the financial crisis is historically unprecedented. Before the crisis, short-term unemployment closely tracked total unemployment (because there were fewer long-term unemployed), so either measure could be used to forecast wage growth reasonably well.

"It is only since the last recession and its aftermath, when the composition of the total unemployment rate deviated from its historical pattern, that we can observe the differential effects of unemployment duration on compensation growth," say Linder, Peach, and Rich.

The view advanced by Yellen and the FOMC -- that long-term unemployment is a hidden source of labor-market slack -- does not hold up against this analysis, and is beginning to come under fire by market economists on Wall Street.

Following her testimony on Tuesday, UBS economists Drew Matus and Kevin Cummins called Yellen's an "odd view of labor market slack," suggesting that high long-term unemployment was a structural issue, not a cyclical one that could be improved by monetary policy.

"As expected, she downplayed the progress of the unemployment rate and the importance of the unemployment rate itself arguing that the long-term unemployed and the number of workers who are part time but who want full time are also important to gauging the amount of slack in labor markets," said Matus and Cummins. "We do not view the long-term unemployed as necessarily 'ready for work' and therefore believe that their ability to restrain wage pressures is limited."

A recent survey of consumers by the New York Fed showed that expectations for wage growth over the next year surged in January.

Goldman Sachs chief economist Jan Hatzius argues the Fed should be focusing more on the behavior of wages and less on persisent low consumer price inflation, suggesting it may help them avoid policy mistakes in the future.

Elevated long-term unemployment is still an important social and economic issue. However, the Fed may be forced to abandon its view of labor market slack if short-term unemployment continues to improve and wage growth continues to rise.

More from Business Insider

Feb 12, 2014 6:03PM
"Will Wages Start Rising Soon?"

Feb 12, 2014 6:01PM
It's never stopped for the RULING CLASS. Why do you think 4 of the 6 richest counties in the United States surround the KINGDOM of WASHINGTON DC?
Feb 12, 2014 6:56PM
Good grief how a over educated nitwit can take plain facts and make it look like rocket science, Minium wage workers are really hurting because prices have increased on everything from A to Z in the last 4 years. consumer goods cost are at least %33 percent above minium wage but you will never get the politicians or anyone in a wealth position to admit it. 2 plus 2 has always been four and trying to complicate that fact is a waste of time. Trying to base the facts on some kind of so called index is ridicilous.
Feb 12, 2014 6:05PM
Pretty simple...to pay employees more money...you need to get more money for the product they produce...or cut into profits...which is not going to happen...
Feb 13, 2014 12:49PM

Wages will never rise as we will still have a trade deficit.  As that means we have a service based economy and import all our products because of lower wages abroad.  And because of lower wages abroad and no shortage of workers here wages will remain low.  If they wanted wages and the quality of life to go up for all here they would protect US industries through higher tariffs, but as free trade has become the standard since Reagan's presidency all manufacturing and production jobs are at the mercy of the global market driving wages for the bulk of people down.  If it wasn't for free trade most Asian economies wouldn't be booming like they are because companies never would've moved over their and those workers never would be participating in the market meaning prices would've maintained at previous prices rather than jump.  Oil prices are high due to corruption but also an increase in demand and the largest demand for oil besides the US these days in China and pouring more money into China has only raised the price more because the demand of that market has expanded faster than the supply. 

Feb 13, 2014 12:49PM
This is what capitalism has to offer the working class—mass poverty, accompanied by ever more bloody wars and increasing political repression.

The working class can halt this attack and defend its basic social rights—to a job, a decent wage, nutrition, education, health care, pensions, access to culture—only by mobilizing its vast social power in a political struggle against both parties of Wall Street and the ruling class whose interests they slavishly defend.

Too many Americans are unaware of the extreme disparities that have been caused by the unregulated profit incentive of capitalism. Our winner-take-all system is flailing away at once-healthy parts of society, leaving them like withered limbs on a trembling body, even as the relative few who benefit promote the illusion of opportunity and prosperity for all. Concerned citizens armed with facts are not fooled. Instead, the more they learn the angrier they get. And as in revolutions of the past, discontent leads to change

Feb 13, 2014 12:49PM

Well lets just pass that increase in the minimum wage and kill the economy.  Boosting the minimum wage to $10 per hour would cause huge inflation, get people laid off, and destroy business. It is a 1 year band aid that will end up hurting us more in the end.  The way to get out wage up is to stop sending our jobs overseas!

Feb 13, 2014 1:09PM
Hey MSN, I have had comments that were not racist wiped out, because some person reported it as being racist, yet you do nothing about a comment that is very racist toward white people stand.  To me this seems a little bit wrong.
Feb 13, 2014 12:51PM

A 'cult,' according to Merriam-Webster, can be defined as "Great devotion to a person, idea, object, movement, or work..(and)..a usually small group of people characterized by such devotion."

Capitalism has been defined by adherents and detractors: Milton Friedman said, "The problem of social organization is how to set up an arrangement under which greed will do the least harm, capitalism is that kind of a system." John Maynard Keynes said, "Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone."

Perhaps it's best to turn to someone who actually practiced the art: "Capitalism is the legitimate racket of the ruling class." Al Capone said that.

Capitalism is a cult. It is devoted to the ideals of privatization over the common good, profit over social needs, and control by a small group of people who defy the public's will. The tenets of the cult lead to extremes rather than to compromise. Examples are not hard to find.

"Capitalism is the legitimate racket of the ruling class."

"Everything the right-wing does is designed to accomplish one of two things, either:
(a) transfer wealth from everyone else to the rich, or,
(b) distract everyone else from the fact that (a) is occurring."

Feb 13, 2014 1:38PM
If the American economy is to recover more quickly, then raise wages! Why should the CEO's keep receiving their million + bonuses and employees receive no raises plus having to pay more on healthcare benefits and deductibles? Seems so unfair to me.

Feb 13, 2014 12:50PM
Not in this oligarchy/plutocracy of corruption, privilege and  UNethics!
Feb 13, 2014 12:51PM
Capitalism is a cult. It is devoted to the ideals of privatization over the common good, profit over social needs, and control by a small group of people who defy the public's will. The tenets of the cult lead to extremes rather than to compromise. Examples are not hard to find.

"Capitalism is the legitimate racket of the ruling class."
Feb 13, 2014 10:29AM
Wages will not rise when the government is increasing the costs for businesses!  Obamacare, with its direct costs and indirect administrative ones is an example.  Until the government decides that business cannot continue to be the "goose which lays the golden eggs" the rate of employment will NOT improve.  I know, I know, liberals believe that business is hoarding TRILLIONS of dollars that they don't want to "share" with their voters, er... the poor, and they need to have it "yanked" away.  The problem with this situation is that business is not a tax payer, it is a tax COLLECTER!  If you increase costs for the business, then the business must increase PRICES!  Then it will be a continuous battle of higher costs from government, higher prices from business, and higher PRICES paid by consumers!  That is called "hyperinflation" and the results are not pretty!
Feb 13, 2014 12:32PM
Long term unemployment is lib speak for unemployable.
Feb 12, 2014 9:41PM
Low wages are great population control as America stays mired in record low birth rates.

Keep wages low until we have a new racial majority. Then Manifest Destiny can be returned upon the white race.

Low wages keep birth rates at record lows.

America needs a new majority to teach white men to behave. Brutally teach them if need be.

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