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Never reason from a quantity change

Summary:
The jobs number for February (20,000 jobs) was quite weak. It might just be a one-month blip—the moving average of job creation is still pretty good—but let’s suppose it’s real. What does that mean? It might mean there is not much demand for workers. Or it might mean there is not much supply of workers. How can we tell? One place to start is with wage numbers. Less demand for workers results in lower wages, while less supply of workers results in higher wages. (Supply and demand. You won’t get this sort of PhD-level sophistication in MMT blogs!) Here’s the FT: Wage growth is up to 3.4%, the highest since 2009. As wage growth continues to accelerate, I’m becoming less concerned about the “lowflation” issue. Just to be clear, I’m not saying that wage growth

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The jobs number for February (20,000 jobs) was quite weak. It might just be a one-month blip—the moving average of job creation is still pretty good—but let’s suppose it’s real. What does that mean?

It might mean there is not much demand for workers. Or it might mean there is not much supply of workers. How can we tell? One place to start is with wage numbers. Less demand for workers results in lower wages, while less supply of workers results in higher wages. (Supply and demand. You won’t get this sort of PhD-level sophistication in MMT blogs!)

Here’s the FT:

Never reason from a quantity change

Wage growth is up to 3.4%, the highest since 2009. As wage growth continues to accelerate, I’m becoming less concerned about the “lowflation” issue.

Just to be clear, I’m not saying that wage growth is driven by a reduced supply of workers—it’s very possible that February’s jobs number was just a blip and strong jobs growth will continue in 2019. What I am saying is that if we are in a new era of slower jobs growth then lower supply is the most likely culprit.

Don’t reason from a price change and don’t reason from a quantity change.

Reason from a P&Q change.

PS. FWIW, the FT suggests that February may not be a blip:

Data out over the past month have added to the view US economic growth may be cooling. Both industrial production and retail sales surprised on the downside in January and in December respectively. The housing sector meanwhile had a lacklustre end to 2018, with housing starts falling to their lowest level in more than two years in December while home price growth decelerated.. .

In a sign of the economic uncertainty, Goldman Sachs said this week its rolling forecast for first-quarter US economic gross domestic product was pointing to growth at an annualised rate of just 0.9 per cent. A separate ‘tracking estimate’ from the Atlanta Fed forecasts growth at a rate of 0.3 per cent.

Soft landings have never been easy. This would be America’s first ever.

But if the Aussies and Brits can do it.


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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