The visible hand in economics

Are New Zealand’s inflationary pressures contained: The nominal wage evidence

Posted on: June 25, 2008

Greg Mankiw has an interesting post on what would make a good inflation target (ht CPW). According to work by Ricardo Reis and himself, aiming at the nominal wage is a good way of ensuring the highest degree of price stability – according to models calibrated to recent US data (paper here *).

Using this conclusion he shows a graph of private hourly compensation growth and states that inflationary pressures in the US are not as much of a threat as some analysts are positing.

If the same implication held in New Zealand (which there is no assurance of), how would we be looking:

Source, QES wage data Statistics New Zealand (*)

Not so good it seems đŸ˜›

3 Responses to "Are New Zealand’s inflationary pressures contained: The nominal wage evidence"

I dunno, it just seems wrong to directly target the nominal wage without accounting for real growth.

“it just seems wrong to directly target the nominal wage without accounting for real growth”

I have a concern about that as well – I wonder how real wage growth-productivity growth would do as a variable.

The one advantage that stems from looking at wages ahead of a CPI index should come from a clearer idea of general price pressures instead of relative price pressures. Of course this assumes that relative prices in the labour market are less variable than in the goods market – is that the case?

Another advantage stems from the fact that we are targeting sticky prices in the economy – which are the ones we are concerned about for inflationary pressures (as the flexible ones are only reacting to relative price movements). As a result, it makes theoretic sense that a sticky price target would be better than a composite flexible-stick target such as the CPI.

However, I think Mankiw builds an index rather than just targeting wages as he realises that there is more to it.

Lots more food for thought from knzn on targeting unit labour costs: here and here

This version might be a bit easier to sell politically too as it doesn’t carry the connotation that the central bank is “limiting” wage growth to a target.

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