Workers pay stagnated: IMF
Employers shift to part-time
WASHINGTON, Sept 27, (AFP): Worker pay in rich countries has stagnated as employers shift to part-time and temporary labor while unions declined, helping generate persistently weak inflation, according to new IMF research released Wednesday.
The findings go to the center of the debate in key central banks over how fast to remove the stimulus put in place amid the Great Recession, since low unemployment rates have not led to higher inflation as in a normal economic recovery.
“Recent labor market developments in advanced economies point to a possible disconnect between unemployment and wages,” the International Monetary Fund economists found in their report.
Crunching data from across 29 advanced economies between 2000 and 2016, the IMF study found median unemployment rates fell steadily since 2013 even as labor force participation rates increased.
But that decline in joblessness may represent only a kind of “surface healing,” the authors said.
The jobs recovery since the 2008 crash appeared to coincide with fundamental changes in company-worker relationships, with employers across the developed world increasingly relying on part-time positions and short-term contracts — while employees’ ability to bargain for higher pay eroded.
As a result of the changes, central banks should re-think “the true degree of slack” in labor markets as they begin to withdraw stimulus and raise interest rates, the IMF said.
US economists have been dumbfounded by the enduring weakness of inflation in the current recovery, which has stayed below the Federal Reserve’s target for five years despite unemployment rates falling to near historic lows.
The Fed this year has raised interest rates twice, downplaying the low inflation as the result of transitory factors.
But US Federal Reserve Chair Janet Yellen in a speech Tuesday conceded policymakers might have “misjudged” the strength of labor markets and the forces driving inflation.
The IMF report showed that starting in 2009, wage growth has slowed steadily and temporary labor contracts have become more common. Because wages are the main cost of production, wage gains are the main driver of inflation.
“Core inflation in advanced economies is thus unlikely to recover in a sustained manner before labor market tightening spurs higher wage inflation,” the report said.
Also in the last several years, involuntary part-time employment — in which employees work fewer than 30 hours per work because they cannot find a full-time job — jumped in advanced economies.
The rate in the United States rose to 1.3 percent from 0.8 percent, in Britain it gained 1.5 points to 3.9 percent, and in France it soared 2.5 percent to 7.8 percent of the labor force.
“Policymakers may therefore need to enhance efforts to address the vulnerabilities that part-time workers face.”
The economic outlook is beset by “significant uncertainties,” so moving too quickly to raise rates — which the Fed has done twice this year and four times since December 2015 — “risks overadjusting policy to head off projected developments that may not come to pass,” she told the National Association of Business Economists in Cleveland.
With unemployment already at a very low 4.4 percent, if rates fail to keep pace it could cause the labor market to overheat and risk “creating an inflationary problem down the road,” she warned.
Yellen and her Fed colleagues have long argued that inflation, which recently has retreated further from the central bank’s two percent target, is being held back by transitory factors, and should gradually move up in the next two years.
But she acknowledged that they “may have misjudged the strength of the labor market ... or even the fundamental forces driving inflation.”
Policymakers will need to “stay alert” as more data comes in that could alter their assessments.