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--IMF Stresses Need To Assess Impact Of Involuntary Part-time Workers
--IMF Paper Suggests Trend Productivity Important for Wages, Inflation
--IMF Paper Warns Automation May Weigh on Wages in Future
By Sophia Rodrigues
     SYDNEY (MNI) - The conclusion from an analytical paper published by the
International Monetary Fund on wage dynamics suggests the Federal Reserve may
have to go slow on further policy tightening and the European Central Bank may
need to delay the unwinding of its accommodative monetary policy stance.
     The IMF paper, published Wednesday, says involuntary part-time employment
and trend productivity are important in judging the degree of slack in the
economy beyond the unemployment rate, and they are likely to be key determinants
on how long monetary policy needs to stay accommodative and what the appropriate
pace of exit from accommodative policies should be.
     Involuntary part-time workers refer to those who work part-time but would
like to work more hours. They are also referred to as part-time workers for
economic reasons.
     The paper also suggests increasing cross-border economic linkages may be
contributing to wage weakness and warns that automation could weigh
significantly on wage growth in the future.
     The paper, which will be part of the World Economic Outlook to be published
on October 10, studied the recent wage dynamics in advanced economies from the
starting point that nominal wage growth in most advanced economies remains
markedly lower than it was before the Great Recession of 2008-09.
     The main takeaway from the paper that could be relevant for the Fed is that
a slowdown in trend productivity growth will continue to be a headwind to wage
growth even if the unemployment rate declines. For inflation to pick up,
involuntary part-time employment needs to diminish or trend productivity needs
to pick up. 
     "Assessing the true degree of slack beyond measured headline unemployment
rates will be important when determining the appropriate pace of exit from
accommodative monetary policies," the paper said.
     The paper estimates that in economies where unemployment rates are now
below their averages before 2007, slow productivity growth can account for about
two-thirds of the slowdown in nominal wage growth.
     The San Francisco Fed published a paper in June 2015 discussed how the
involuntary part-time unemployment rate relative to overall unemployment rate
hadn't fallen by as much as in past recoveries. The paper noted that in May 2015
the involuntary part-time rate was 4.2% when the jobless rate was 5.5%, whereas
in previous two economic recoveries the involuntary part-time rate corresponding
to same jobless rate was 3.2%, indicating more slack in the labor market this
time around.
     For the ECB, the IMF paper's observations on economies where jobless rates
are still appreciably above their averages before 2007 is more pertinent.
     In such economies, conventional measures of labor market slack can account
for about half of the slowdown, with involuntary part-time employment acting as
a further significant drag on wages, the paper said.
     "In these economies, wage growth is unlikely to pick up unless slack
diminishes meaningfully -- an outcome that will require continued accommodative
policies to boost aggregate demand," the paper said.
     A paper published by the ECB in March this year estimated that on top of
the unemployment rate, about 3.5% of the working age population are marginally
attached to the labor force - that is, categorized as inactive, but simply
competing less actively in the labor market. There was a further 3% or around
seven million of the working age population who were involuntary part-time
workers. Both added to the slack in the economy.
     "Combining the estimates of the unemployed and the underemployed with the
broader measures of unemployment suggests that labor market slack currently
affects around 18% of the euro area extended labor force. This amount of
underutilization is almost double the level captured by the unemployment rate,
which now stands at 9.5%," the ECB paper said.
     "As well as suggesting a considerably higher estimate of labor market slack
in the euro area than shown by the unemployment rate, these broader measures
have also recorded somewhat more moderate declines over the course of the
recovery than the reductions seen in the unemployment rate," it added.
     In its most recent monetary policy statement, the ECB noted that labor
market slack was still significant but expressed optimism that a prolonged
period of growth above potential implied a progressive closing of the output gap
and the reabsorption of labor market slack, supporting a gradual rise in
inflation over time.
     The IMF paper concludes that the bulk of the wage slowdown since the
recession can be explained by labor market slack, including involuntary
part-time employment, as well as weak inflation expectations and low trend
productivity growth. 
     Another interesting takeaway from the paper is how economic and labor
market conditions in one economy are affecting conditions in other economies, in
turn exerting increasing downward pressure on wage inflation in the aftermath of
the global financial crisis and especially during 2014-16. 
     "The finding of sizable common factors behind wage weakness could indicate
the growing effect on wage setting in any given economy of labor market
conditions in other countries in the context of stronger cross-border economic
integration," the paper said.
     "It could also point to the role of broad-based and synchronized demand
weakness across many countries and heightened concern about job losses, which
may have hindered wage growth in the aftermath of the global financial crisis
and the euro area sovereign debt crisis," the paper added.
     The paper also discussed the effect of automation, which has so far made a
small contribution to wage weakness but could have a bigger impact in the
future. It used the relative price of investment goods as a proxy for the impact
of automation. 
     "Automation appears to have made a small contribution to subdued wage
dynamics following the Great Recession due to a limited decline in the relative
price of investment goods in recent years compared with the previous downward
trend," the paper said.
     "The analysis suggests that automation could weigh on wage growth more
substantially in the future if the decline in the relative price of investment
goods were to pick up again," it added. However, it also pointed out that
inferences about the impact of automation are not straightforward given that, as
noted previously, the relative price of investment goods is just one channel
through which its influence on wage growth may play out.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
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