I saw some people on Twitter characterizing my post this morning about monetary policy and the labor share of national income as saying that this was my explanation of wage stagnation. It’s not—at least not quite. And it’s important to be careful and precise here.
One issue is wages—the amount of money that workers get paid. The other is the wage or compensation share of the economy. These are related but distinct ideas. Given sufficiently rapid productivity growth, it’s perfectly coherent to imagine rising wages and a shrinking wage share. (Something like this has happened in China, I believe.)
The monetary policy issue speaks exclusively to the shares point. When wages grow faster than productivity, that’s inflationary. When there’s a persistent patch of labor-market weakness, wages grow slower than productivity. So if the Federal Reserve always prevents inflation but sometimes permits a persistent patch of labor-market weakness, then the wage share is going to shrink. To maintain a stable wage share, the central bank would either need to flawlessly stabilize the macroeconomy or else commit offsetting, random errors. Obviously a no-errors regime would be better than the random-errors regime, but we don’t have either of those things. Instead we have a regime in which the errors are systematically biased toward occasional recessions followed by “jobless recoveries.” That’s not an accident; it’s a deliberate feature of policy framework that places a lot of weight on central bank credibility and essentially no weight on distributional issues.
