Great Graphic: Intl Comparison Labor Costs Per Employee

It almost seems surreal.  The major central banks seem to agree that wages need to rise. Usually, to the extent central banks address the issue, they traditionally have cautioned against large pay increases. And is so doing, reveal their underlying pro-business agenda. Why should it matter to a central bank how the productivity gains are divided between wages on one hand, and profits on the other. 

One reason for the usual desire to keep wages intact is that there is the belief that wages are the key driver for core inflation.  Yet, the cost of labor in the total cost of production has steadily fallen. This is the mirror image of increased productivity.  This can be seen in the secular decline in manufacturing employment.

Services are by definition more labor intensive.  However, even in many services, that account for the bulk of services employment, technological advances, including the rise of the internet, has increased the productivity of service sector workers.  Increasingly shoppers are expected to scan their own goods at check-out counters, for example.

The lack of aggregate demand and low inflation has facilitated the shift in central bank views.  Even the German Bundesbank has come out in favor of higher wages throughout the euro area.  At Jackson Hole, the issue for US and UK officials was how to measure the slack in the labor markets, and how much of that slack is cyclical and how much is structural.

Some pundits points out that central bankers simply do not know.  While that may be a fair assessment, as a criticism it is not very biting, as private sector economists also do not know.  Or to say it better, there is a vigorous debate over these issues, and reasonable people can and do differ.

Yellen’s attitude differed from her immediate predecessors. She did not appear to project greater confidence in her views than she had.  She recognized the difference of opinion.   At the same time, her bias seemed clear. She argued that there is both a cyclical and structural component, and with inflation expectations anchored, the Federal Reserve will continue to try to address the cyclical component.