Danny Blanchflower Discusses Labor Economics (Masters in Business, 75 mins)

(You can listen to the podcast by clicking here)

Danny Blanchflower, former Bank of England MPC member attempts to decipher the puzzle of muted wage growth despite unemployment nearing its natural rate. He states that income inequality disincentivizes the working class to raise productivity. He also questions whether the natural rate of unemployment (NAIRU) is about 4%, as western central bankers commonly believe. Blanchflower explains that if NAIRU was at 4%, we would have seen significant wage growth by now and the concept of the Zero Hour Contract (in the UK) would be deemed absurd. He claims that NAIRU in westerns state is around 2-2.25 % due to the structural break after 2008 GFC that caused workers to lose their bargaining power. 

Why does this matter? If NAIRU is below 4%, it makes central bank susceptible to policy errors. Moreover, it also puts things in perspective. After all, the recent cut by the FED could be more than just ‘Global Macro’ risks growing and ‘Mid Cycle’ adjustment, as they claim. In fact, it could be the rectification of prior errors – hiking rates when they shouldn’t have. Consequently, using Blanchflower’s argument and with the recent inversion in the US yield curve, it seems the markets may have got this right.

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(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)

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