Does the Fed Control Wages?
Could it be said that the Federal Reserve controls wages the same way they control the prices of goods and services? According to a CNBC article on Thursday, it seems the answer is “yes.”
A less than stellar August jobs report showed:
Average hourly earnings jumped 0.6% for the month, about double what Wall Street had been expecting, and the increase from a year ago stood at a robust 4.3%, up from a 4% rise a month ago.
Strangely, these stats make news headlines when it's fair to say the general public has no appetite to hear “average hourly earnings” increased by 0.6% for the month. These headlines provide little context and the general public has no idea where these figures come from, how they were calculated, nor what they mean.
The Fed also keeps various data about wages, such as the Average Hourly Earnings of All Employees, Total Private data set, with the average hourly earnings being $30.80 per hour. Consider geographic locations like New York City, Green Bay, or Honolulu, then think about how many different types of jobs are in existence. Whether a barista, construction worker, teacher, doctor, nurse, engineer, or president of a bank, one should question the usefulness of arriving at an average wage for an entire nation.
Nonetheless, statisticians and the Fed claim they have a way to calculate this.
The problem is how it is applied for planning purposes. According to the article:
Some voices on Wall Street expect the wage and inflation numbers to start resonating with Fed officials.
Like inflation data, it becomes concerning when wages rise too fast, requiring the Fed’s intervention in order to correct.
During Powell’s Jackson Hole address, he did say:
But if wage increases were to move materially and persistently above the levels of productivity gains and inflation, businesses would likely pass those increases on to customers, a process that could become the sort of "wage–price spiral" seen at times in the past.
While the Fed has long believed in a Deflationary Spiral, we can add a Wage-Price Spiral on the list of economic threats the Fed should monitor.
Despite not telling readers how the Fed can control wages, or elaborating on the notion of a wage-spiral, CNBC is quick to assure readers that the Fed will look at:
…potential pressures that could trigger a wage-price spiral, which economists consider “bad” inflation.
They attempt to add further depth of analysis by quoting the Chief Economist from Moody’s Analytics who tells us: “Powell and the Fed will be content with allowing wages to rise for now.” Concluding:
But so far, they’d say the wage growth they’re observing is more a feature than a bug.
It all seems somewhat haphazardly contrived, as if these economic slogans are being made up with no firm backing or theory behind them. Calculating the average wage is problematic. Add the idea that wages could rise too much or too fast, it would trigger prices to increase, causing the wrong type of inflation; the bad as opposed to the good inflation. These are all various steps in what amounts to a very big leap of faith. The only thing worse is the conclusion that, for now, the Fed is monitoring the situation.