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Sep 04 2015

Productivity, Jobs and Wages

The Fed has spent much of 2015 cultivating expectations for a Fed funds rate hike this year. However, justifying near-term rate hikes just became a whole lot harder with last month’s spike in global market volatility raising doubts over the resiliency of the U.S. economy, while any surge in inflation remains nowhere in sight.

One issue that now looms large on the Fed’s rate hike agenda is the slump in productivity growth. Weak productivity growth, which relates to long-term trend growth, could become a binding constraint on the Fed, effectively leaving it with even less room to maneuver short-term interest rates. In ECRI’s latest research, we look into what has driven the post-Great Recession slump in productivity growth, and how it relates to trends in job and labor compensation growth, with important implications for both the economic outlook and monetary policy going forward.

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