Regional President Speech

Federal Reserve Bank of San Francisco ABOUT US OUR PEOPLE JOIN US What We Study Our District Research & Insights News & Media / NEWS & MEDIA / SPEECHES / MARY C. DALY’S SPEECHES Wage Dynamics: Theory, Data, and Policy SPEECH INFO Slides presented virtually at the National Bureau of Economic Research Spring 2021 Wage Dynamics in the 21st Century Conference By Mary C. Daly, President and Chief Executive Officer, Federal Reserve Bank of San Francisco For delivery on May 21, 2021 DOWNLOAD PDF (684 KB) Wage Dynamics: Theory, Data, and Policy NBER Wage Dynamics in the 21st Century Panel Remarks May 21, 2021 Mary C. Daly President and CEO Federal Reserve Bank of San Francisco The views expressed here are mine alone and do not necessarily reflect those of anyone else in the Federal Reserve System. The Way It’s Supposed to Work STRONGER WAGE PRICE EMPLOYMENT HIRING GROWTH INFLATION INFLATION The Data: Unemployment and Wage Growth Real wage growth and unemployment Notes: MWE series is shown as 4-quarter growth rates. Only data until March 2020 is shown. Source: Bureau of Labor Statistics and Bureau of Economic Analysts The Data: Unemployment and Wage Growth Real wage growth and unemployment Procyclical A little of everything Countercyclical Acyclical Procyclical Notes: MWE series is shown as 4-quarter growth rates. Only data until March 2020 is shown. Source: Bureau of Labor Statistics and Bureau of Economic Analysts The Data: Wage and Price Inflation Inflation and Wage Growth since 1970 Note: Series shown are 3-quarter moving averages. Source: FRBSF calculations using data from Bureau of Labor Statistics and Bureau of Economic Analysis A Number of Structural “Wedges” Cloud the Picture STRONGER WAGE PRICE EMPLOYMENT HIRING GROWTH INFLATION INFLATION • Wage Rigidities • Monetary policy • Declines in worker • Anchored expectations bargaining power • Decline in COLAs • Unmeasured • Industry strategic compensation complementaries • Employment composition But Within Cycle Dynamics Also Matter Normal labor market cycle Unemployment rate Low Good • Employment drops, layoffs spike, initial claims rise, quits fall, wage growth slows, involuntary part-time employment increases. High Bad • Layoffs slow and initial claims recover. • Job finding rate remains subdued. Long-term unemployment rises. Labor force participation drops. • Wage growth continues to slow. Recovery and • Hiring recovers and payroll employment grows. Transition • Wage growth plateaus below trend. • Labor market tightens. Broad measures of unemployment decline. • Voluntary turnover (quits) increases. • Labor force participation recovers relative to trend. • Wage growth picks up. Good Low 7 And Here There is Notable Asymmetry Unemployment rate Low • Employment drops, layoffs spike, initial claims rise, quits fall, wage growth slows, involuntary part-time employment increases. High • Layoffs slow and initial claims recover. • Job finding rate remains subdued. Long-term unemployment rises. In downturn and early Labor force participation drops. stage of recovery, • Wage growth continues to slow. adjustments are through quantities. • Hiring recovers and payroll employment grows. • Wage growth plateaus below trend. • Labor market tightens. Broad measures of unemployment decline. As labor market tightens, • Voluntary turnover (quits) increases. adjustment increasingly • Labor force parttihcriopuagtiho np rriecceos v(ewrasg reesla).t i ve to trend. • Wage growth picks up. Low 8 Impact of Cyclical Composition Changes Within-Group and Total Wage Growth (1997-2016) Expect this effect to be especially large in the pandemic Source: Daly, Mary C., and Bart Hobijn. “Composition and Aggregate Real Wage Growth.” American Economic Review 107, no. 5 (May 2017): 349–52. https://doi.org/10.1257/aer.p20171075 Labor Supply More Elastic Than We Think Civilian Labor Force Participation Rate, ages 25-54 Note: Data are seasonally adjusted. Source: Bureau of Labor Statistics Strong Sustained Growth Gets Into the Cracks Job finding rate for women by race/ethnicity Notes: Series shown are 12-month moving averages. Data are not seasonally adjusted data. Source: FRBSF calculations from matched monthly Current Population Survey data And Chips Away At Long-Standing Gaps Wage Growth by Skill Level Note: Series shown are 12-month moving averages of median wage growth for each category, hourly data. Sources: Current Population Survey, Bureau of Labor Statistics, and the Federal Reserve Bank of Atlanta. What’s Needed? • Deeper understanding of within cycle dynamics – Why they occur – How to quicken the pace towards recoveries (policies) • More work on the cyclicality of the employer-employee matching process – Recruiting intensity of firms – Search intensity of workers • More work that explicitly incorporates the micro evidence on worker labor market entry and exit decisions and worker-firm dynamics into macro models of business cycle dynamics 13

Mary C. Daly (2021, May 20). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20210521_mary_c_daly

@misc{wtfs_regional_speeche_20210521_mary_c_daly,
  author = {Mary C. Daly},
  title = {Regional President Speech},
  year = {2021},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20210521_mary_c_daly},
  note = {Retrieved via When the Fed Speaks corpus}
}