If only a smattering of economics had managed to stick:
But this is neither a normal president nor a normal economic boom. For starters, though wage growth is finally ticking upward, ordinary workers have nothing like the bargaining power they used to enjoy in an economy with unemployment as low as 3.5 percent.
This is true. This is also the point.
Think on the Federal Reserve and their dual mandate. The task is to keep inflation at about – either side of – 2% and to have full employment. The usual definition of full employment here being the tautologous, in this detail, rate of unemployment that doesn’t push inflation over that roughly 2%.
OK. And the normal American recession – that is, most post-WWII ones except the last – have been created by the Fed. Inflation looks like going above the 2%, or has been at it for some time even, so they raise interest rates to engineer a recession. This increase unemployment and brings inflation back down again.
This is the Philips Curve, there’s a trade off between inflation and unemployment. The Philips Curve which lots of people say isn’t operative these days.
But, of course, it is. What changes is the structure of the underlying labour market. How much power do unions have, that’s one example of that structure. How geographically mobile is the workforce? This is one reason why the US has always had a more fluid market than Europe. Even, do unemployment benefits last forever or only 6 months – another reason for greater American fluidity. The greater that fluidity, the more flexible the labour market is, then the lower the unemployment rate at which that inflation starts to appear. Therefore, the more labour market flexibility we’ve got the lower we can push the unemployment rate before we engineer a recession to kill off inflation.
We think that this is good too. We think that it’s better that all those who want to work can. Better, fer sure, than having people rotting in unemployment just to make sure Granny’s savings don’t disappear. So, we’re in favour of flexible labour markets so that there’s less unemployment.
Sure, such flexibility means that in the good times – now – labour has less power than it used to. But that’s the trade off we get in order to be able to have 3 and 4% unemployment with no inflation.
Labour having lower bargaining power isn’t an error here, it’s the point.