Chairman Greenspan: “You realize that the labor unions would say that was awful: you say it’s wonderful.”
Mr. Syron: “That’s right, but we are not in an AFL-CIO meeting. And they have a little different view than we do on what is considered wage inflation.”
– From the Federal Open Market Committee Transcript, February 1990
Matt Yglesias writes about progressives needing to engage the Federal Reserve in the latest issue of Democracy Journal. I agree with the article completely; now is the time for new thinking about this topic.
Here’s a question I’ve been trying to find research on lately – how much is the post-Volcker era of monetary policy responsible for stagnating wages and high-end inequality? I’m pretty familiar with the stories and arguments surrounding these two topics, and the Federal Reserve never shows up. It’s almost like taking an American phone charger overseas; there’s no place for monetary policy to “plug-in” the current research and arguments, from technology to superstars to policy to everything else, on wages/inequality. Which is weird, since when you read transcripts of their FOMC meetings, released years after the time when they were recorded, the board members are obsessed with wages. We have a sense of the Greenspan Put for the financial sector, but what’s the Greenspan option-metaphor for workers?
A friend just sent me this paper, Not Yet Dead at the Fed: Unions, Worker Bargaining, and Economy-Wide Wage Determination (2005) by business economists Daniel J.B. Mitchell and Christopher L. Erickson. They go through and read twenty years of the FOMC transcripts.
For some people there is no “After the Cold War.” Even though the Cold War had ended, its mindset must continue. One way to phrase Mitchell and Erickson’s argument is that from 1980 through the end of the 1999s is no “After the Professional Air Traffic Controllers Strike Strike.” Even though unions were declining since 1980, even though unions weren’t striking anymore, the Federal Reserve described the labor market as if it was dominated by unions. Every wage increase in the private, non-union sector was hawkishly monitored for the potential of wage-push inflation. Their abstract:
Transcripts of the Federal Open Market Committee of the Federal Reserve and related documents provide new insights into how macro policy makers characterized the labor market. Over the period of the 1980s and the 1990s, the Federal Reserve seemingly overemphasized the significance of union settlements, characterizing them in wage-push terms out of proportion to declining union density. Fed policy makers expressed surprise that the NAIRU dropped during this period and offered various ad hoc explanations to explain the drop. The underlying common element of these explanations is that they were based on a rhetorical bargaining framework, explicit or implicit: that workers bargain as active agents for wages. Along with ongoing direct discussion of union settlements, this tendency suggests a view of worker bargaining power that seems at variance with union decline and the reality of an increasingly nonunion labor market. While worker bargaining models can be reconciled in a formal sense with various theories of nonunion wage determination, the ability of such models realistically to explain the macro outcomes that puzzled and challenged policy makers can be questioned.
They were so primed to go against wage increases for unions that they watched wage increases for everyone lest they lead to runaway inflation. The article is really interesting, and it pulls many quotes from the transcripts. I went to double check some of the quotes they used, and I’ll re-print them here.
Chairman Greenspan March, 1993.
I think everything we can see is exceptionally well behaved in the crucial area of labor costs, which on a consolidated basis obviously comprise the great chunk of our underlying cost structure. There is no ambiguity here; wage rates are clearly under control. And we are not yet seeing, despite our saying that we might, any signs of a significant pickup in contract wage pressures on the union side, which incidentally is now a very small part of the economy–and it’s an even smaller part if you take out the government workers that have unions. The major area of wages in our system is basically outside the union area; and compensation, which is far more important these days than the underlying wages, is [not] under very significant pressures. One of the reasons we have seen such a huge increase in temporary versus non-temporary employment over the last several years is that the underlying cost structure is enforcing pressures to restructure, [inducing firms] to go to temporary workers to try to alleviate all sorts of costs. And basically that is succeeding. That is, unit labor costs clearly are under very significant restraint. Productivity is picking up in a fairly substantial way, and I suspect it is basically real.
Wage rates and labor costs were “under control….under very significant restraint.” One reason why? Because work was becoming more contingent, transfering from temporary to non-temporary employment. Besides lower wages, it also gives employees less bargaining power (he develops this theory elsewhere), which will keep wage-push inflation in check. I bring it up as an example because three things people try and find casual arguments for – the decline of unions, wage stagnation, the increasingly “risk-shifted” nature of work – are all things discussed under the price stability mandate of the Greenspan Federal Reserve here.
Chairman Greenspan, December 1994, my favorite:
I think the interesting question is why wages are not responding to what is a very rapidly tightening labor market. After speaking to some labor leaders and others who talk to their members and have a sense of this, I get the impression that long-term job insecurities are quite pervasive especially with respect to the portability of health insurance and pensions that make workers more cautious about changing jobs. The layoff rates are very low; the turnover rates are really quite low by American standards; and there is a tendency among workers just to stick with what they have. The effect of this, I suspect, is a major factor in holding wage increases to a very sluggish pace considering all the evidence we have been getting in recent months of labor market tightness. This is crucial because so long as that is the case and productivity is positive, unit costs are very well contained.
Sometimes health care wonks will write about how the lack of portability of health insurance creates “job lock”, and how “job lock” reduces an employees bargaining power to get raises since they can’t credibly threaten to leave their job. Alan Greenspan agrees, and though he doesn’t say its awesome, he does note that it is keeping unit costs well contained. Unit costs being your paycheck, that is.
Hey look, its Janet Yellen, January 1996, explaining how she is worried about zero inflation, since a little bit of inflation greases the wheels of the economy:
MS. YELLEN …But as we get to lower rates of inflation, we need to think much more carefully about the costs and benefits of moving to still lower rates. There are benefits, but during my time on the Committee, we never really have talked about what the benefits are or attempted to evaluate them concretely. I believe there also are costs of moving to very low inflation rates. I am persuaded that there is at least a significant one-time output loss. There also may be a further permanent loss that occurs because a little inflation, particularly in an economy with slow productivity growth, greases the wheels and makes relative wage adjustments easier and may facilitate intersectoral allocations of labor. This is a subtle point, but I think we never have evaluated or tried to measure it.
Is this what we should be going for when choosing strong liberal Federal Reserve members? President Obama took forever in getting Janet Yellen onto the Federal Reserve, waiting until April 28, 2010 to nominate her, getting her sworn in on October 4, 2010.
Last but not least, August 1997, when the Fed is pissed about the UPS strike that was finishing up:
MR. MCTEER Now that the UPS strike is apparently over, there is nothing obvious on the horizon to spoil the party, although I suspect we will find that the strike has done a good deal of damage in the past couple of weeks. The settlement may go a long way toward undermining the wage flexibility that we started to get in labor markets with the air traffic controllers’ strike back in the early 1980s. Even before this strike, it appeared that the secular decline in real wages was over, although productivity gains appeared to be sufficient to keep unit labor costs under good control.
GREENSPAN It may well be that the real significance of the UPS strike is that we are beginning to see a reversal of what had been a dramatic development: The air traffic controllers’ confrontation with President Reagan set in motion a fundamental change in policy for this country more than 15 years ago. It is conceivable that we will look back at the UPS strike and say that it too signaled a significant change.
“A good deal of damage.” I would not say, even at the time, that the UPS strike signaled a change towards stronger unions. But even the possibility of it sent the Federal Reserve board up the wall, as if unions were one more strike away from dominating the labor economy, and they were checking out what bazookas they could get on the table.
Read the transcripts, if wages were increasing significantly over this time period some of the most powerful people in the country would feel as if they failed in their job. So my question is legitimate: Who is studying if this had an impact on stagnating wages? How would they go about studying? What are the falsifiable hypotheses? What are the mechanisms – can the Fed create an expectation for employers of stagnant wages?