Macro and Markets
Commentary about the Biden administration’s proposed fiscal relief policies has relied heavily on estimates of the economy’s potential output. However, few commentators or policymakers look under the hood to check how these estimates are calculated.
The Framework Review and Forward Guidance center labor market outcomes over inflation in evaluating interest rate policy. However, the Fed haven't clarified how they will evaluate inflationary dynamics under the new regime.
While The Shock may have ended, labor market indicators suggest that we still need to respond appropriately to The Slog if we are to avoid a repeat of the lackluster “jobless recovery” following the 2008 crisis.
Between mid-February and mid-March, the number of Americans unemployed grew by 1.4 million. But the rise in Americans reporting any type of labor market disruption — absence, wanting more hours, or not having a job at all — was almost four times that number: 5.6 million.
The coronavirus shock will lead to a dramatic spike in the unemployment rate. But even this surge could understate the true labor market damage from the virus.
The impact of COVID-19 is likely to be sizable. Regardless of the precise composition of the shock to supply and demand, further macroeconomic policy action is now necessary.
Labor force entry likely explains between ⅓ to ½ of the rise in US prime-age participation from its recent trough, and that the level and slope of labor force flows suggest prime-age participation may have even further to rise in the absence of exogenous shocks.
Canada shows us that even when PA EPOP is pushed to new highs, wage and price acceleration does not necessarily follow or persist. It is time we rethink the interactions between labor markets and inflation.
The Federal Reserve should revise its framework to achieve at least a floor rate of gross labor income (GLI) growth, as opposed to simply tweaking its existing strategy of targeting consumer price inflation.
