When we take into account the fact that monetary policy only affects the economy slowly, developing a policy prescription is more complex. In the past two years, the Fed has raised the fed funds rate by 5.25pp. Only a fraction of that increase has taken effect right now. The rest might be enough to bring the unemployment rate to its efficient level.
I mention immigration in this month's post because immigration is a policy that has immediate effects. As soon as immigrants reach the labor market, they start looking for jobs. So immigration cools the labor market more quickly than monetary policy. Given that the unemployment rate is still below target but the Fed has stopped acting, it makes sense to open the doors to immigrants who want to work in the US.
Reasonable. So given (!) how slowly monetary policy instrument settings take effect, neither immigration or employment efficiency observations have direct relevance to instrument setting. [Of course you get the immigration liberalization conclusion directly from micro, too.]
I've asked Claudia Sahm to comment on your approach, not with the idea of producing controversy, but to elucidate the background assumptions of your and her different approaches.
This analysis shows no role played by wage levels. After all, if there is a shortage of candidates (supply) relative to vacancies (demand), one would expect the price of labor (real wage) to rise. Unskilled wages are where they were before the pandemic while profits have risen:
Looking at the chart in the article it seems that recently the gap between vacancies and unemployment rate has been closing by falling vacancies. It would seem that businesses are deciding to go without new hires. Could it be that the vacancies reported are those that companies would *like* to fill for pre-pandemic real wage levels, but can't fill in today's world without going back to pre-pandemic profit levels?
Neoclassical models predict that real wages will rise when labor supply is low compared to labor demand. But these models do not have unemployment, so they are not very helpful to think about the real world.
In models with unemployment, there is no guarantee that wages rise when the market is tight. In fact, it is because wages have not risen much that the market has become so tight—and more generally it is because real wages are fairly rigid that unemployment fluctuates so much.
As for the recent decline in vacancies, I think part of it is due to the tightening of monetary policy by the Federal Reserve.
Why wouldn't unemployment serve as labor supply? It is true that wages don't always rise when supply is tight. In fact, for unskilled wages, there was little rise after the 1970's, save for the three years before the pandemic. But wages used to rise.
Of course, people who are unemployed are supplying labor.
I was only saying that the models which predict that real wages will rise when labor supply is low compared to labor demand are models without unemployment. In models with unemployment, and in real life, there is no guarantee that wages rise when supply is low compared to demand.
Of course. But wages are not going to rise when unemployment is equal to or greater than vacancies. So treating labor tightness as a problem to be remedied, instead of letting supply and demand work out reduces the likelihood of wage increases. Seems like there's an implicit value judgement here.
Who should do what on the basis of your finding that the labor market is inefficiently tight? The Fed should not reduce the EFFR?
As discussed last month (https://pmichaillat.substack.com/i/142424248/implications-for-monetary-policy), since unemployment is currently below its efficient rate, a static reasoning suggests that monetary policy should continue to raise the fed funds rate to cool aggregate demand and labor demand.
When we take into account the fact that monetary policy only affects the economy slowly, developing a policy prescription is more complex. In the past two years, the Fed has raised the fed funds rate by 5.25pp. Only a fraction of that increase has taken effect right now. The rest might be enough to bring the unemployment rate to its efficient level.
I mention immigration in this month's post because immigration is a policy that has immediate effects. As soon as immigrants reach the labor market, they start looking for jobs. So immigration cools the labor market more quickly than monetary policy. Given that the unemployment rate is still below target but the Fed has stopped acting, it makes sense to open the doors to immigrants who want to work in the US.
Reasonable. So given (!) how slowly monetary policy instrument settings take effect, neither immigration or employment efficiency observations have direct relevance to instrument setting. [Of course you get the immigration liberalization conclusion directly from micro, too.]
I've asked Claudia Sahm to comment on your approach, not with the idea of producing controversy, but to elucidate the background assumptions of your and her different approaches.
This analysis shows no role played by wage levels. After all, if there is a shortage of candidates (supply) relative to vacancies (demand), one would expect the price of labor (real wage) to rise. Unskilled wages are where they were before the pandemic while profits have risen:
https://mikebert.neocities.org/HS-dropout-wage.gif
Looking at the chart in the article it seems that recently the gap between vacancies and unemployment rate has been closing by falling vacancies. It would seem that businesses are deciding to go without new hires. Could it be that the vacancies reported are those that companies would *like* to fill for pre-pandemic real wage levels, but can't fill in today's world without going back to pre-pandemic profit levels?
Neoclassical models predict that real wages will rise when labor supply is low compared to labor demand. But these models do not have unemployment, so they are not very helpful to think about the real world.
In models with unemployment, there is no guarantee that wages rise when the market is tight. In fact, it is because wages have not risen much that the market has become so tight—and more generally it is because real wages are fairly rigid that unemployment fluctuates so much.
As for the recent decline in vacancies, I think part of it is due to the tightening of monetary policy by the Federal Reserve.
Why wouldn't unemployment serve as labor supply? It is true that wages don't always rise when supply is tight. In fact, for unskilled wages, there was little rise after the 1970's, save for the three years before the pandemic. But wages used to rise.
Of course, people who are unemployed are supplying labor.
I was only saying that the models which predict that real wages will rise when labor supply is low compared to labor demand are models without unemployment. In models with unemployment, and in real life, there is no guarantee that wages rise when supply is low compared to demand.
Of course. But wages are not going to rise when unemployment is equal to or greater than vacancies. So treating labor tightness as a problem to be remedied, instead of letting supply and demand work out reduces the likelihood of wage increases. Seems like there's an implicit value judgement here.