Jobs, Inflation And The Phillips Curve
So, you know card if we have been doing the indicator for just over a year, but you know, during that whole time, we have never missed a jobs Friday that's true every single month when the bureau of labor statistics releases its employment report, we always do show about it. Except last Friday, I know because he indicators at this big economic conference in Atlanta. So we figured hey, it's no big deal. It's just one jobs report. Right after the holidays, how big of a deal could it really be to just miss it. This one time breaking news now with the release of the monthly jobs report. The president call today's jobs report greats three hundred twelve thousand jobs added during the month hopes. We've got to do Cardiff jobs Monday. This is the indicator I'm Garcia, and I'm Stacey Vanik Smith. And we are here in like sublease men see of giant Mary conference center in Atlanta with like thirteen thousand condoms all around us all staring at us. What just because we have a massive shotgun. My count. What's the big deal people? And we're yelling about job. No. And they're all talking about the jobs report, including quite a few famous economists. And today we hear from them about the jobs report. And Stacey we forgot something. Yes, we did. Support for this podcast and the following message. Come from a sauna Asana is work management software to help teams organize everything they do. So they can focus on the work that matters. Most try us on our free for thirty days. Get started at a son dot com slash indicator. Support also comes from UNITA budget their award winning app and proven method have helped hundreds of thousands of people gain total control of their money. Get out of debt and save more faster. Try it free at you. Need a budget dot com. So at this economics conference in Atlanta. There was this panel. I mean, there were a lot of panels. But there was a major panel. It was like the power panel to hear from three most important shapers of economic policy of our. Our panelists they need no introduction in this room. At least it was like Bianciotti Konya and Taylor swift were on a panel together. Actually don't know where you're going with this analogy. But I dig it I'm curious after a long career Viansa Brunetti, former chairman of the Federal Reserve steer the economy through the financial crisis. Followed a few years later by yelling after similarly accomplished chanted Konya Yellen. Ganja come from. This is. Having a weird year. It's having a weird year. Yellen though is of course, a former fed chair as well. She took over the fed after Ben banenky? And she happens to be the first female to chair the fed about time. And then finally there was g Powell is. He tricky Taylor swift Powell current chairman of the Federal Reserve behold the power panel. And of course, you know, the first topic that comes up is. Yeah. I mean, the jobs are jobs are here. That's why we're here. Yeah. It was a pretty stellar report. Three hundred twelve thousand jobs added in December strong wage growth. And of course, unemployment is still below four percent. And given that some other economic indicators have been signalling that maybe the economy was going to slow in twenty nineteen. This was surprising, and yeah, really fantastic report. And then here's Jay Powell's response. So very strong report today. Like running around the room, yelling USA USA. I mean, it is literally part of his job to be calming and not exciting. But what's your pals next was still kinda muted? But really interesting. That's that's quite welcome. And also for me at this time doesn't does not raise concerns about to high inflation does not raise concerns about to high inflation that seems like a weird comment to make right? Like, we add it all these jobs. But that doesn't mean I'm worried about inflation yet. But there is a reason that he immediately mentioned inflation economists discussed the relationship between unemployment and inflation all the time in that relationship is often referred to as the Phillips curve. And that's this idea that if enough people are working in other words, if unemployment is really low, then it will cause higher inflation that the pace at which prices of the things we buy will go up, more and more. So here's the idea when employment is low a couple things happened. I wage is start to go up because companies are competing for workers. So then companies raise the prices of things they sell because they have to make up for the money. They're losing to higher pay that causes piracy Shen second as wages. Go up. People have more money to buy stuff. So that also striving prices, and according to the Phillips curve, the reverse is also true. So when unemployment is really high then inflation should becoming down because then companies don't have to raise wages to compete for workers because there's just more workers out there who need a job, and we got kind of test to this starting back in the very late nineteen seventies and early nineteen eighties. Inflation was really high and seemed to be out of control prices were rising and rising and rising and then Paul Volcker PUM Jagger Volker. Okay that works. He was the head of the Federal Reserve at the time and Volker did to get inflation under control. Was he raised interest rates all the way to twenty percent by comparison interest rates right now. Short-term interest rates are two percent. All right. So raising interest rates all the way to twenty percent lead to a weaker Connie and unemployment went up way up. It went all the way up to ten percent. But inflation did come down. And ultimately the economy settled down and seemed to be on track by the early eighties, which brings us back to Jay house comment. The unemployment rate is low right now and in twenty eighteen wage growth did start exceleron. And so everybody's wondering is chair pal. A look at this and worry about inflation. And then going to keep raising interest rates to prevent inflation from spiking higher for me. At this time doesn't does not raise concerns about to high inflation Jerry Palestine, the even though unemployment is low and wage growth is rising. It doesn't necessarily mean that higher inflation will follow. So this relationship between inflation in jobs, even though the Phillips curve predicts it POWs, not really seeing it death-list curvy and Janet Yellen, by the way, Janet Conde gallon agreed. The linkage. So I believe that there is a linkage between slack in the labor market in product markets and inflation, but the strength of that linkage is not very great. So we have relatively flat Phillips curve is in the way of putting that a flat Phillips curve. So nick. Phillips curve dead. So so to use a slaying economic jargon. This is in dodge Innis, phenomenon dodgy phenomenon exactly I was just thinking that you know, what? But also he recognized that he was dropping a jargon bomb. So that's okay. Basically, what Bernanke saying is that the relationship between unemployment and inflation has changed. And he says it started changing with Volker in the late seventies. Chairman Volcker three of us a big favor by hanging flation under control, and helping to anchor inflation expectation, basically back when inflation was super high in the seventies people then saw that the Federal Reserve would raise interest rates really high. If it needed to to bring inflation back down and ever since then inflation has stayed low because of that people in companies right now don't think there's much of a chance that inflation will get out of the Fed's control in the future. And here's the key people and companies act accordingly because if they worried that inflation was going to be much higher in the future. They would spend more money now while their dollar would still buy stuff and companies would raise prices to try to get ahead of the trend and that would contribute to inflation going higher right now. But. It's not happening right now. Unemployment is low and yes wage growth is going up, but companies are not raising their prices aggressively. And what Ben Bernanke you saying is that it's precisely because of what the fed did in the past that the link between low unemployment and high inflation is weaker than it used to be and the gave us flexibility the ability to to take very stimulant of steps without worrying place, you'll become immediate problem. And that's the quote in dodge in his reason, why the Phillips curve is so flat thinks part of the reason inflation stays in. Check is because of this faith in the job of Federal Reserve chair that faith is part of what changed the economic relationship between unemployment and prices, so the communists still strongly debate whether the Phillips curve is really dead or just resting. But if it is then it was possibly killed by the people in this room people with this job fed chair. In other words, it's Dazs Innis. The indicator is produced by Constanza guy Gherardo edited by paddy Hirsch and produced by NPR. 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