Generations of economics students have been inculcated with the Phillips Curve trade-off between increased inflation and lower unemployment. It makes sense that attracting and retaining employees when unemployed workers are harder to find puts upward pressure on wages, which transmits itself into higher prices throughout the economy. That common sense relationship seems to have broken down, however, during the past few decades. The questions arise: Is the Phillips Curve no longer valid? Was it ever? I believe the theory behind it remains valid, but that it's practical effect has attenuated due to two primary determinants: (1) the rapid increase of globalization, most obviously in manufacturing but also in services as well, which obtained during the past 25 years, and (2) the increased pace in the adoption of labor-saving technology by American employers, which makes them less sensitive to changes in the supply of labor. The offshoring of labor requirements makes employers less dependent on domestic labor, so that labor shortages in the U.S. can readily be dealt with by moving manufacturing operations overseas, or by contracting with service providers located in foreign countries. The increased ease by which automation can replace workers (think of fast food restaurants which have replaced much of their staff with kiosks, etc, in response to minimum wage increases) decreases the upward pressure on total labor costs. The underlying relationship remains, but its importance to the economy has abated.
Published by: Skip Cooper
This narrative and its contents represent the views solely of the writer and not the Cooper Family Office, its entities, related entities, members, independent advisors and any other affiliates. It cannot and does not contain professional advice or guidance of any type and should not be used this for any purpose other than discussion. In no event are we responsible, without limitation, for any loss or damage whatsoever from any actions taken as a result of the information contained herein. The Cooper Family and the Cooper Family Office, its entities, related entities, members, independent advisors and any other affiliates have made no effort to ensure the accuracy, validity, reliability or correctness of anything stated in this document or on the Cooper Family website. The Cooper Family and the Cooper Family Office, its entities and assigns reserve all rights to protect the privacy of this document. Possession, distribution, publishing, disclosure, copying, reprinting, paraphrasing or quoting of all or any part of this proprietary document by others is strictly prohibited. The Cooper Family and the Cooper Family Office, its entities, consultants and assigns do not accept liability for any errors, omissions or adverse consequences from the content of this message for any reason. This is not an offer to sell any investment, product, fund, company, advisory or any other service and it should be noted that nothing produced, issued or disseminated by us or any related party, member, consultant or entity is a suggestion to take any action or actions whatsoever. The above references an opinion and is solely to share thoughts and opinions among our team and investment managers. It is not intended to be investment advice.
Comments