Matthew O'Brian
@ The Atlantic:
Are the long-term unemployed just doomed today or doomed forever?
That's the question people are really asking when they ask if labor markets are
starting to get "tight." Now, it's hard to believe that this is even a debate when unemployment is still at 6.7 percent and core inflation is just 1.1 percent. But it is. The new inflation hawks argue that these headline numbers overstate how much slack is left in the economy. That the labor force is smaller than it sounds, because firms won't even consider hiring the long-term unemployed. That our productive capacity is lower than it sounds, because we haven't invested in new factories for too long. And that wages and prices will start rising as companies pay more for the workers and work that they want.
In other words, they think that the financial crisis has made us permanently poorer. That the economy can't grow as fast as it used to, so inflation will pick up sooner than it used to—and we need to get ready to raise rates. (Notice how that's always the answer no matter the question).
There are only two problems with this story: There's not much evidence for it, and we should ignore it even if there is. It's pretty simple. If tighter labor markets were causing wage inflation, they'd have caused wage inflation. But they haven't, not really. Now, it's true that average hourly earnings ticked up in February, but, as Paul Krugman points out, that was probably a weather-related blip. All the snow kept 6.8 million people from working full-time like they normally do, and, historically-speaking, that tends to affect hourly workers more than salaried ones. So higher-paid people probably made up a bigger share of the workforce last month—and voilà, it looked like wages rose. But that was just statistical noise, and if you look at the bigger picture, wage growth is still far below its pre-Lehman levels.
