The Fed Will be Vindicated on Wage Inflation

Raises will come, eventually.

Photographer: Andrew Burton/Getty Images

The markets have started to price in a slower pace of interest-rate increases by the Federal Reserve even as the labor market strengthens. Many interpret that as a sign investors believe the traditional relationships between jobs, wages and inflation are broken. What it really means is that faster wage inflation will come, only at a lower unemployment rate than in the past.

To understand why, look no further than the internet. It’s widely accepted that comparison shopping is much easier on the internet, and this is almost certainly holding down inflation, as more knowledgeable consumers force companies to be highly price-competitive. The internet has also altered the job search process. Companies can reach vastly more candidates to fill vacancies, which intensifies competition in the labor market.

Before the internet, employers attracted workers by posting job-vacancy signs in their windows or by taking out ads in newspapers. Increases in help-wanted ads were a reliable indicator of a stronger economy. As use of the internet grew, firms found that posting job openings electronically reached a greater number of candidates to fill vacant positions far more effectively and efficiently than newspaper ads. It was no longer necessary for job seekers to subscribe to local papers to find out about openings.

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The Fed Will be Vindicated on Wage Inflation

Raises will come, eventually.

Photographer: Andrew Burton/Getty Images

The markets have started to price in a slower pace of interest-rate increases by the Federal Reserve even as the labor market strengthens. Many interpret that as a sign investors believe the traditional relationships between jobs, wages and inflation are broken. What it really means is that faster wage inflation will come, only at a lower unemployment rate than in the past.

To understand why, look no further than the internet. It’s widely accepted that comparison shopping is much easier on the internet, and this is almost certainly holding down inflation, as more knowledgeable consumers force companies to be highly price-competitive. The internet has also altered the job search process. Companies can reach vastly more candidates to fill vacancies, which intensifies competition in the labor market.

Before the internet, employers attracted workers by posting job-vacancy signs in their windows or by taking out ads in newspapers. Increases in help-wanted ads were a reliable indicator of a stronger economy. As use of the internet grew, firms found that posting job openings electronically reached a greater number of candidates to fill vacant positions far more effectively and efficiently than newspaper ads. It was no longer necessary for job seekers to subscribe to local papers to find out about openings.

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