Getting out of a Jackson Hole

Every August, the great and august among central bankers and strategists of the world economy meet as guests of the Kansas City Federal Reserve for an economic symposium at Jackson Hole, Wyoming, a ski resort under the Teton mountains. After the planes, helicopters and limos have transported them all to the luxurious lodge, the participants make and hear presentations and speeches on the economic issues of the day.

This year, the theme was ‘labour market dynamics’, in other words, the strategists of capital (mainly US capital) were considering whether labour markets in the major economies were sufficiently ‘flexible’ to reduce the high levels of unemployment engendered by the Great Recession and to look for the causes and solutions to the very slow recovery of employment. (

In one paper, mainstream economists, Steven Davis and John Haltiwanger, of the University of Chicago and University of Maryland, reckoned that “the US economy became less dynamic and responsive in recent decades.” And the reason was too much government regulation. They calculated that the fraction of workers required to hold a government-issued licence to do their jobs rose from less than 5% in the 1950s to 29% in 2008. Adding workers who require government certification, or who are in the process of becoming licensed or certified, brings the share of workers in jobs that require a government-issued licence or certification to 38% as of 2008, they say. So the slow recovery from high unemployment is the fault of government regulation and not the market economy.

In contrast, Giuseppe Bertola, economics professor at EDHEC Business School, reckoned that it was more government action, not less, that was needed to get unemployment down. Bertola argued that some job protection and unemployment assistance may offer a positive ‘trade-off’ not only for the individuals receiving them but also for the economy as a whole. What was needed was not more ‘flexibility’, but more ‘rigidity’! “Rigidities can be beneficial in imperfect economies, where the flexibility that employers like is the other face of the precariousness that workers fear,” he wrote. Bertola cited the German model of work-sharing through reduced hours, made possible by strong cooperation between labour unions and large corporations, as having allowed unemployment to remain lower in Germany than in the United States during the crisis–and to come down consistently since.

Bertola’s line is not welcomed by the mainstream in analysing the causes of high unemployment. Indeed, in another paper for Jackson Hole, Jae Song, an economist at the Social Security Administration and Till von Wachter, a professor at the University of California, Los Angeles argue that the problem of long-term unemployment does not really exist. “In contrast to the behavior of long-term unemployment, long-term non-employment behaved similar in the Great Recession” to previous recessions, they say. So the level of permanent unemployment is no worse than before and there is no need to wait to tighten monetary policy. The economy is not permanently damaged and indeed is ready to go.

To sum up, the mainstream economists at Jackson Hole generally found that the US unemployment situation was not too bad and any unemployment left was due to too much government regulation and lack of flexibility. So there would be no problem if the Federal Reserve ended its quantitative easing measures and started hiking interest rates. The US economy would cope and ‘return to normal’ without any serious repercussions.

Janet Yellen is not so sure. Both Janet Yellen, the first woman head of the Federal Reserve and Mario Draghi, the first Italian head of the European Central bank, made speeches on the state of the economy, the pace of ‘recovery’ (or otherwise) and what they as central bankers would do about it with monetary measures. The US Federal Reserve board members are split on whether the US labour market has recovered sufficiently for the Fed to start raising interest rates and ‘return to normal’. For the hawks (still in a minority), the rapid decline in the unemployment rate shows that ‘slack’ in the economy is disappearing so the Fed should ‘tighten’ monetary policy soon. For the doves (led by Yellen), the low rate of wage growth suggests there’s plenty of slack and tightening should wait.

In her Jackson Hole speech, however, Yellen seemed to less sure about the slow pace of ‘recovery’ ( She dithered. As one commentator noted, she used “1 coulds, 20 buts, 11 woulds, 7 mights and a magnificent 56 ifs.” The doves argue that the huge drop in the labour participation rate, which measures how many of those of working age actually have a job, showed that there many people who wanted a job, but had just given up looking and so were not counted among the unemployed but should be. And many of those working are in part-time or temporary jobs (see my posts on this, In other words, the labour market was still slack.

Labour participation

But Yellen presented a new argument for the hawks. She cited a paper by the San Francisco Fed that argued during the Great Recession wages were not cut by most firms, but now that recovery is under way, employers are holding back on pay rises. This was a form of “pent-up wage deflation.” At some point, as the labour market ‘tightens’, this will end and wages would then rise quite rapidly. So maybe the Fed should pre-empt the impact on inflation by raising interest rates sooner than originally planned.

But this assumes that rising wages from the end of ‘pent-up wage deflation’ would cause higher inflation. It depends on how the value of the national product is shared between the owners of capital in profit and labour in wages. Way back in 1865, Marx dealt with this issue in a debate inside the International Workingmen’s Association eventually published in a pamphlet entitled, Value, Price and Profit. Marx argued that wages can rise without any effect on prices if profits fall. Indeed, that would be the usual result. (

In mainstream economic terms, we can pose it this way. There has been a huge divergence between productivity growth and wage growth since the 1980s in the US and elsewhere. Profit shares as part of value added have rocketed to record highs. Indeed, it is estimated that wages in real terms could rise 10% to restore the gap with current productivity growth, a measure of the non-inflationary leg room from a rise in wages now.

Productivity and wages


Of course, such a wage rise would hit profits and that is the real problem for capitalism, not inflation. If companies cannot raise prices to compensate because of weak demand for their goods and services and strong competition nationally and internationally (prices are rising just 1% a year in international traded goods), then profit share will fall and the mass of profits will also probably fall, triggering a new slump in investment. After all, despite the massive rise in profit share, US corporate profits are now starting to drop. A 10% wage rise would be a last straw.

corporate profits

In the Great Depression of the 1930s, wages recovered sharply but inflation of prices did not. What the rise in wages did do was contribute to a fall in profitability (as Marx posed in Value, Price and Profit), engendering a new slump in 1937. And the Fed helped to tip the economy into a slump by hiking interest rates to stem ‘inflation’. See my post

Wages and inflation in 1930s

Even the Federal Reserve finds little connection between wage rises and inflation (see a new paper by some Chicago Fed economists ( “We do find that wages are sensitive to economic activity and the level of slack in the economy, but our forecasting results suggest that the ability of wages to help predict future inflation is limited. Thus, wages appear to be useful in assessing the current state of labor markets, but not necessarily sufficient for thinking about where the economy and inflation are going.”

Yellen is not sure what would happen. If the Fed were to tighten too soon, it could abort the recovery and send the economy back into a new slump. On the other hand, if inflation starts rising then interest rates will have to be hiked even if the price is a new recession. But Yellen does not know which.

The problem for the ECB appears to be different. The Eurozone economy shows no sign of ‘recovery’ whatsoever and the risk is more that it will slip into an outright deflationary depression, something that the southern Eurozone states of Greece, Portugal, Italy and Spain are already experiencing. The average inflation rate for the whole area is already near zero and the Eurozone is beginning to look like Japan in its stagnation of the 1990s that Abenomics is trying to end (see my post,

In his speech, Mario Draghi talked about taking action to provide more credit for the banks and companies and keep interest rates near zero for much longer – the opposite of Yellen’s musings (

He hinted at new measures similar to that of the Fed, namely quantitative easing, i.e. buying up government bonds through the printing of more euros. “The risks of doing too little outweigh the risks of doing too much,” he said.

So the prospect for 2015 (the seventh year since the Great Recession began) is of the Fed tightening credit and raising interest rates and of the ECB doing the opposite. The risks are aborting the relative US economic recovery and/or the collapse of the Eurozone into outright depression (see my post,

3 thoughts on “Getting out of a Jackson Hole

  1. Presumably wage rises would help consumption, thereby lifting the profit prospects. And given the huge liquid reserves of US firm, this could indeed speed up recovery. I have not read the Marx document, but if he does not mention that perspective, there are good reasons for it, demand from laborers only becoming a factor in capitalist economies in the second half of the nineteenth century – ever so timidly.

  2. Great post ! When someone try to bother me with “transformation problem” or “growing real wages=rising inflation” I always send him back to the reading of “Value, Price and Profit”.
    TOday Citizens Weston are still around.

  3. Michael,

    “Of course, such a wage rise would hit profits and that is the real problem for capitalism, not inflation. If companies cannot raise prices to compensate because of weak demand for their goods and services and strong competition nationally and internationally (prices are rising just 1% a year in international traded goods), then profit share will fall and the mass of profits will also probably fall, triggering a new slump in investment. After all, despite the massive rise in profit share, US corporate profits are now starting to drop. A 10% wage rise would be a last straw.”

    The graph above this paragraph, showing an increasing divergence between productivity growth and hourly compensation is a good summary of the increase in the rate of profit over that time period.

    Its not at all clear that a rise in wages would cause a significant fall in the mass of profits, which is presumably why many states in the US are pushing through fairly large rises in the Minimum Wage, and why even the Tories on Britain have been considering such rises.

    More significantly, in Capital III, Chapter 12, Marx explains why wage rises can actually result in an increase in the mass of profits for the larger capitals. He sets out that a general rise in wages, causes a fall in the average rate of profit – as also described in VP&P. However, he goes on to show that the effect of this fall in the average rate of profit, is that prices of production for capitals with an above average organic composition of capital, fall as a result, whilst the prices of production of capitals with a below average organic composition of capital rise.

    Generally, it will be the large capitals that have higher than average organic compositions, and vice versa. But, the only way this lower price of production for the former can come about is by the supply of commodities produced by these capitals increasing and conversely, the only way that the prices of production for the latter capitals can rise, is if the supply of commodities produced by these capitals declines.

    In other words, capital must migrate from the smaller capitals towards the larger capitals, bringing with it a further concentration and centralisation of capital. But, this increased quantity of capital in the former, now producing an expanded quantity of commodities, sold at lower prices, means that demand in this sector must thereby rise also. Depending upon price elasticities, it is quite possible that the increased capital invested in these sectors, now producing and selling an increased quantity of commodities, will, as a result see its mass of profit rise not fall.

    If previously 1 million units were produced and sold, each providing £2 of profit, this will be exceeded if, as a result of the change, the firm produces and sells 1.2 million units, each providing £1.90 of profit. The mass would be £2.28 million of profit, as opposed to £2 million prior to the fall in the average rate of profit.

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