Imaginary Wage-Inflation Conundrum


Economists are puzzled over the wage growth conundrum. Wages were supposed to rise significantly. They didn't. Why?

Let's start with a look at the conundrum expressed in a Tweet.

Confused? Most economists were, especially at Econoday. I wasn't.

There's still no wage inflation underway but the flashpoint may be sooner than later based on unusual strength in the February employment report. Nonfarm payrolls rose an outsized 313,000 which is more than 80,000 above Econoday's high estimate. Revisions add to the strength, at a net 54,000 for January which is now 239,000 and December which is 175,000.

Despite all this strength average hourly earnings actually came in below expectations, at only plus 0.1 percent with the year-on-year 3 tenths under the consensus at 2.6 percent. But given how strong demand is for labor, policy makers at the Federal Reserve may not want to risk runaway wage gains as employers try increasingly to attract candidates.

The workweek further points to strength, up 1 tenth to an average 34.5 hours for all employees with the prior month revised 1 tenth higher to 34.4 hours (the private sector workweek rose 2 tenths to 38.8 hours with manufacturing also up 2 tenths to 41.0 hours in a gain that points to strength for next week's industrial production report).

The unemployment rate held at a very low 4.1 percent as discouraged workers flocked into the jobs market. The labor participation rate is another major headline, up 3 tenths to 63.0 percent and again well beyond high-end expectations.

The sheer strength of the hiring in this report would appear certain to raise expectations for four rate hikes this year as Fed policy makers may begin to grow impatient with their efforts to cool demand.

Month-Over-Month Wages

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Year-Over-Year Wages

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Conundrum? What Conundrum?

The conundrum is imaginary. It is based on the Phillips Curve, a nonsensical idea, disproved numerous times. Yet, economists still cling to it.

The Phillips Curve, is an economic model developed by A. W. Phillips purports that inflation and unemployment have a stable and inverse relationship.

On August 29, I noted that a Fed Study Shows the Phillips Curve is Useless.

The paper, co-authored by Philadelphia Fed Director of Research Michael Dotsey, shows that forecasting models based on the so-called Phillips curve, which asserts a link between unemployment and inflation, don’t actually help predict inflation.

Their study is timely. Fed officials have been surprised by a deceleration in U.S. inflation over the past several months despite a continued decline in unemployment, the opposite of what the Phillips curve relationship would predict.

“We find no evidence for relying on the Phillips curve during normal times, such as those currently facing the U.S. economy.”

That report is not surprising at all other than a Fed researcher finally admitted the obvious.

There Is No Phillips Curve

Pater Tenebrarum at the Acting Man Blog provides this chart.

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Believers Hold Firm

In March of 2017, then Fed Chair Janet Yellen commented in a post-FOMC Q&A “The Phillips Curve is Alive“.

Stanley Fischer, then Vice-Chair also mentioned falling unemployment as a determinant for rising inflation.

Wikipedia offers this amusing comment: "In recent years the slope of the Phillips curve appears to have declined and there has been significant questioning of the usefulness of the Phillips curve in predicting inflation. Nonetheless, the Phillips curve remains the primary framework for understanding and forecasting inflation used in central banks." ​

Wage Growth

Year-over-year wages are only up 2.6%, on average.

The median worker is doing much worse but that data will not be available for over a year.

The latest median wage data is from May of 2016. It shows real median wages decline in seven out of the last 11 years.

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For details, please see How the Fed's Inflation Policies Crucify Workers in Pictures.

Weak wage growth has not kept up with inflation, despite the BLS purporting otherwise.

Inflation Is in Assets

There is plenty of inflation, but it's in asset prices.

As a direct result of the Fed's total incompetence in understanding inflation, bubbles are readily apparent in equities, in junk bonds, and in Bitcoin speculation.

No Economic Benefit to Inflation

My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

BIS Deflation Study

The BIS did a historical study and found routine price deflation was not any problem at all.

Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

​It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.

Deflation Around the Bend

​Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.

This is precisely why the Fed's expectation of lasting higher inflation is dead wrong.

Stupidity Well Anchored

Inflation expectations may or may not be well anchored, but stupidity sure is.

Extremely destructive asset-deflation is right around the bend.

Mike “Mish” Shedlock

Comments (12)
No. 1-12

Remember this pharase: "there are lies, there are damn lies and then there are statisitcs" These numbers are deliberately understated as is the CPI. Anyone in business will tell you there is a labor shortage and employers are raising wages significantly. I don't know why people buy this low wage growth bs I guess its the same people who believe the govt CPI stats.


One possibility is misleading UE data that does not reflect a large reservoir of under and unemployed workers. Remember also the disappeared from the labor force, i.e., prime working age males.

Mike Mish Shedlock
Mike Mish Shedlock


"I don't know why people buy this low wage growth bs I guess it's the same people who believe the govt CPI stats."

Actually, it's entirely believable. For starters, it's easily measured. Moreover, 2.6% year-over-year seems about right.


It doesn't matter how many open "Retail Sales Associate" exist. The pay isn't going up.


If you want to be paid well, you need to acquire the skills needed to get the decent paying jobs that actually sit empty. As hmk points out, there are labour shortages in some areas. But if you don’t have the right education and skills, you are stuck in a low pay, no raise situation.


Retail wages are rising greater than 3% but ask anyone in manufacturing or business' that require skilled trades. Again these figures do not jive with real life experiences.


This Mish post helps explain why the Fed starts jawboning "higher interest rates are coming" every time news gets out that tight labor market conditions might be indicative of wage increases right around the bend. Don't know how they will do it, but the next target of Fed largess will be main street, and wages. They have done the wealth effect gig to the limits, now they need to get the money churning. Their reluctance up to this point is likely, that they know that once wages and prices leave the chute, they go viral, and become very difficult to rein in. Velocity gone wild worries them. That's why they are trying to buy time to get rates up enough to build enough offing to put out the fire they will have started. Just a theory, so, don't "bank" on much. Some 6 sigma event could derail the whole shebang.


Many retail workers look like they are not qualified for any skilled type of job. Remember the govt and bleeding heart do gooders with their 15 an hour for workers who look like they have the IQ of a napkin and likely can't pass either a drug or driving check. Am I being harsh sure, but trust me I am a lot nicer than any hiring manager


I am agnostic when it comes to minimum wages and any increases to minimum wages. However, if you want to succeed in a financial way, you should acquire the skills and education necessary to obtain a well paid job/career. I sympathize with minimum wage earners, if for some reason they are unable to better themselves.


If there was a stable and inverse relationship between inflation and unemployment, Zimbabwe and Venezuela would be the hottest labor markets on earth.

The Phillips Curve is nothing more than yet another example, of the kind of obvious nonsense you end up with, when mediocrities who couldn’t hack it in the natural sciences, try to pretend half-mastery of techniques applicable in those fields, have any relevance to economics whatsoever. Economics never was, never will be, some form of empirical endeavor. Because the subjects under study, rational actors, aren’t stable. Instead they learn and optimize, so that the next time the exact, down to individual subatomic particles, conditions occur again, they behave entirely differently, in an entirely unpredictable from the “data” manner, in order to improve the utility they derive from the situation, compared to last time.

IOW, past performance, no matter how much impressive sounding statistical mumbo jumbo some clueless can’t-see-the-forest-for-the-trees hack throws at it, is not just no guarantee of future results. Rather, it is completely, 100%, utterly irrelevant to anything. It’s no more than a random, historical anecdote. Cue Philips curve.


There is absolutely no clear relationship with wage growth and inflation. It's a silly idea that the Feds relies on an old observation and try to remodel it with some formulaic solution. According to Bernanke, Phillips curves remains the Feds Only-tool to predict inflation. (which is really sad). My own proprietary model shows that wage growth is just part of a bigger relationship and right now it is not showing inflation. (Red = CPI, blue = my model). I suggest looking at gasoline prices for inflation

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