MNI INTERVIEW: SF Fed's Leduc Sees Tame Wages, QE In Downturn

--San Francisco Research Director Says Little Evidence Labor Income Surges As

Unemployment Falls

By Greg Quinn

     SAN FRANCISCO (MNI) - Technology may keep U.S. wage growth sluggish even as

joblessness falls to new records, the Federal Reserve Bank of San Francisco's

research director told MNI, sketching out a low-interest rate future in which

quantitative easing may need to be supplemented by other tools in the face of

downturns.

     Wage gains around 3% remain in line with factors like productivity and

inflation, Sylvain Leduc said in an interview after the latest job report showed

an unemployment rate of 3.5%, the lowest since 1969. Leduc recently published a

paper showing labor's share of economic output dropped from 63% in 2000 to 56%

in 2018, and he said in the interview that there was no clear catalyst in view

for that to rebound.

     The natural rate of unemployment, at which wage pressures are sufficiently

subdued not to feed inflation, is declining as automation is increasingly an

alternative to paying more for workers, he said. The FOMC's September meeting

documents showed the median projection of members for longer-run unemployment at

4.2%. The range of views was 3.6% to 4.5%.

     "A few years ago you would say five percent, before that five-and-a-half,

and now we are more like the low fours. You could be slightly below that even."

     Sluggish wage gains have given the FOMC room to cut borrowing costs as a

trade war with China looms. With interest rates already low, the Federal Reserve

may also more frequently find itself at the lower bound of monetary policy, and

have to resort to extraordinary instruments such as quantitative easing and

forward guidance, he said.

     But QE's impact may not always be the same as it was in the global

financial crisis, and it may have to be supplemented with other tools, such as

average inflation targeting.

     "The uncertainty for instance in terms of quantitative easing is how much

of the impact we've seen during the crisis was due to the fact that financial

markets were really disrupted. And do they have the same bang for the buck in

normal times versus at times when markets are facing disruption," Leduc said.

     "We have learned a fair amount about those policies, there is still a fair

amount of uncertainty and I think that's why you want to make sure that they

would provide enough policy space, and whether they need to be compensated with

other forms of strategies like make-up strategies," he said.

     --AVERAGE INFLATION TARGETING

     One such strategy could be targeting an average rate of inflation, Leduc

said in a follow-up email. "It would be easier to communicate with the public,

since it would still focus on the inflation rate," he wrote.

     Average-inflation targeting is being considered this year in the Fed's

review of its monetary policy strategy, tools and communications, together with

other methods, such as price-level targeting.

     But, even with such approaches, restoring labor's share of output will

remain beyond the Fed's remit, Leduc said, arguing that other arms of public

policy are better suited to tackle an issue which is, in part, driven by

technological advancement.

     "One option that the firms have is that if they are facing difficulties in

finding talent, and would need to increase wages to attract talent, I mean often

they are thinking about automation," Leduc said. "Some jobs are going to be lost

to automation and others will be created, and the view over the long run is that

automation will be beneficial, but clearly in the short run you can have

disruptions."

     Other factors might also keeping labor income in check. The recent rebound

in "prime age" workers participating in the job market could be a "pressure

valve," Leduc said.

     "The best way forward is to try to make sure that growth is inclusive and

that we have the policies to try to mitigate the impact on workers," he said.

"And in the past we have probably been guilty of that mind you, giving speeches

and at the end mentioning the disruptions and the need for policies to mitigate

the impact, but I think maybe now they need to be much more front and center."

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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