Surely, the low unemployment rate is an important factor. Economic theory tells us that when workers are scarce, employers have to raise wages, though it hasn’t always worked out that way: Wage growth underperformed productivity and inflation during some periods of low joblessness, including in the mid-1980s and mid-2000s.
Indeed, economists at Goldman Sachs recently studied which factors drive wage trends in 10 major economies, and identified low productivity growth as the main culprit behind the recent weakness in wage numbers around the world. (Low inflation, Jan Hatzius and Sven Jari Stehn found, has been “a negative but more temporary factor.”)
Recently, labor costs have begun to grow faster than revenue for some companies, which attribute that development to a mix of government policy and general good times.
“While food costs are pretty benign, you are seeing, certainly in some markets, some pretty good inflation rate in wages,” said Patrick Doyle, the chief executive of Domino’s Pizza, in a recent conference call with analysts. “Some of it is a result of the minimum wage, but some of it is simply because there are areas in the country where employment levels are strong.”
Even if we don’t have complete answers, that much is relatively straightforward. But the wage question quickly leads us into more difficult economic questions.
Everything in macroeconomics is linked, though not in ways that are fully understood. The relationship between joblessness and inflation is known as the Phillips curve, for example, and it points downward: The lower the unemployment rate, the higher the inflation rate should be.
Or at least that’s the theory, and one that is a starting assumption for a great deal of policy making. The Federal Reserve Board reckons it can’t let the unemployment rate get too low, or a burst of inflation will…