inflation; unemployment; labour productivity

It is an old adage that the market is a weighing machine in the long-term and a voting one in the short-term. The latest data published by the Federal Reserve in its Z1 Financial Accounts of the United States show the weighing and the voting pointing in sharply different directions. Read more

Unemployment cannot fall much more in Japan, the UK and the US without inflation rising. The actual growth of gross domestic product therefore needs to slow, through a decline in the strength of demand, to each economy’s trend growth rate. Monetary policy will be dangerously off course if central bankers are too optimistic. This is a high risk as consensus estimates for these trend rates are way above those indicated by recent changes in labour productivity (table one). The Bank of England, for example, predicts that GDP per hour worked will rise over the next two years to nearly two per cent per annum. Read more

There is a widespread belief that “labour is steadily losing out to capital”. This was, for example, the title of an article in The Economist last year (4 October). With the important exception of the US, the data show this to be a myth.

The ratio of labour incomes to gross domestic product is commonly used to justify the claim. This has several faults. First, the data do not support it, as there has not been a general decline in the labour share of GDP. Second, the fluctuations in the labour share of GDP are not matched by compensating changes in the profit share. Third, a serious look at the issue would use another approach and consider whether labour has lost out to capital in their share of corporate output. Read more

“When will the Bank of England raise interest rates?” is the usual question. “When should it?” is the important one. The bank has a long history of “acting too little and too late”. As I explained in inflation and deflation, inflation is more dangerous than deflation and prudent central bankers would rather act too soon to raise rates than be too late and then be forced to cause a recession to get inflationary expectations back under control.

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