Wages and Labor Market Slack: Making the Dual Mandate Operational
Corrected November 13, 2014: The previous version of this paper included a quotation that was incorrectly attributed to Federal Reserve Chair Janet Yellen; it actually was from a report on remarks by Chair Yellen, and mistakenly presented as a quotation. We have removed the erroneously attributed statement from the document. We apologize unreservedly to Chair Yellen, the Federal Reserve, and our readers for our error.
Blanchflower and Posen examine the impact of rises in inactivity on wages in the US economy and find evidence of a statistically significant negative effect. These nonparticipants exert additional downward pressure on wages over and above the impact of the unemployment rate itself. This pattern holds across recent decades in the US data, and the relationship strengthens in recent years when variation in participation increases. They also examine the impact of long-term unemployment on wages and find it has no different effect from that of short-term unemployment. They argue that their analysis provides strong empirical support for the assessment that continuing labor market slack is a key reason for the persistent shortfall in inflation relative to the Federal Open Market Committee's (FOMC) 2 percent inflation goal. Further, they suggest their results point towards using wage inflation as an additional intermediate target for monetary policy by the FOMC. View related conference.