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Is the curve dead ?

Posted by griffithd on January 6, 2018 at 2:35 PM

"The Phillips curve given by A.W. Phillips shows that there exists an inverse relationship between the rate of unemployment and the rate of increase in nominal wages. A lower rate of unemployment is associated with higher wage rate or inflation, and vice versa.”

42 years ago I graduated with a joint History and Economics degree from Kenyon. The Phillips curve was a core principle of any Macro track in economics. Today on the way home with Bloomberg Radio on the discussion centered on why the relationship is not in play in today’s US economy.

The reason I find this a fascinating subject is twofold. One, wages are not increasing in relation to the economy, as good as it is reported to be, and with inflation taken into consideration, one could make a case for stagnant wages. Also, too many segments of our population, while employed, wages are low relative to a living wage. Second, looking at the company boards I serve on, the ability to grow margin is one of the most significant issues. On analysis, increasing benefit costs is one factor, but the interesting one to me is the loss of pricing friction due to technology.

Specifically, one could hold and grow prices when information on availability, specifications, delivery convenience, and product information was part of a firms value add. In today's internet world along with the supply chains explosion, that friction is near zero. You can research, purchase, and have delivered almost any product at the most competitive price. In a commodity world holding margin is increasingly difficult. Great for consumers, not so much for employees.

The de facto result of the loss of price friction is business forced to reduce costs, and after costs of goods sold, labor is often a firm's most significant expense. The result is the growth of part-time, low wage, low benefit labor, the growth of automation, and the growth of the self-employed in a growing “gig” economy. Shareholders demand profits and a traditional response is what we most often see.

My point, especially given my current work with poverty, is that traditional thinking is not going to restore the Philips curve relationship and in fact, it may no longer be valid.

Employment is the way out of poverty, but jobs with a living wage, benefits and the opportunity for growth through performance.

We need to rethink our workforce development programs along with our vocational education tracks to get people ready for these new jobs. In addition, we need to create business models where returns are considered not only in absolute terms but also the social impact. Investors need to look for profits that are both absolute, but also create employment with living wages.

Perhaps a different tax plan would drive better social behavior and in turn, reduce social safety net spending. It is one thing to have a trained workforce; it is another to have work for them to do. Public policy can create the path here, and the private sector can nimbly respond. Most business I know has a skill gap. That gap is only the start to address job growth; we need a much more substantial response that drives real job growth.

Much of this work is connecting the dots that drive the right outcome. The real prize is in implementing the changes that will change employer behavior and provides employment that lifts all of us.

Time to change the curve.

Who says economics is dull?

Categories: Muddy Boots, Griffith Thoughts, Leadership

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