3. Post-1994 is also when we saw a decoupling of goods inflation from services inflation
3
4. There is no evidence that goods prices in the US are even
related to domestic labor slack anymore
4
Using:
5. Goods prices are more related to import prices; we think because of the unprecedented
outsourcing of US manufacturing to China in recent decades
5
6. So is the Phillips curve broken? Well, no: there’s still a relation between labor slack and
services inflation
6
7. But the Phillips curve slope for services appears to have flattened considerably
7
8. We buy into the Autor et. al. view that outsourcing to China created a glut of displaced workers
seeking employment in low-wage domestic service sectors. We think this is what flattened the services
Phillips curve slope.
8
“a negative shock to local manufacturing reduces the demand for local
non-traded services while increasing the available supply of workers,
creating downward pressure on wages”
9. Our view has important implications for Fed policy, as with the unemployment rate
approaching conventional NAIRU estimates, some are arguing for tighter monetary policy
9
10. Fortunately, the Fed is starting to get it: the FOMC has been revising down it’s estimate
of the NAIRU and is showing a preference for being behind the wage inflation curve
10
11. This is good. The last time the Fed fell behind the wage inflation curve (late-1990s), those
at the bottom saw real wage gains on par with those at the top.
11
