Linda Nazareth is a senior fellow at the Macdonald-Laurier Institute. Her book Work Is Not a Place: Our Lives and Our Organizations in the Post Jobs Economy is now available.
The Bank of Canada was hardly a trendsetter when it decided not to raise interest rates this week, but then again being avant-garde is hardly something that anyone looks for in their central banks.
Whether it’s the United States, China, Britain, Turkey or Sweden, the leaning among central banks these days is to leave interest rates where they are, for a couple of reasons. The first is that there are reasons to worry about the slow pace of economic growth, even if in the past bankers have tended to err on the side of inflation-caution and raise rates anyway. The second is that you do not have to be that cautious about inflation when you can hardly see it, and in Canada as in many countries, it is not that easy to spot.
If history were anything to go on, we would be seeing inflation all over the place right now. After all, unemployment rates are at generational lows in many parts of the world, including in Canada. As of March, the unemployment rate in Canada was 5.8 per cent, pretty close to its lowest level since Statistics Canada started tracking it in 1976.
Under any conventional economic assumptions, we should know how this kind of labour market situation plays out. That is, if it is hard to get accountants or construction workers or nurses then the people who want to hire them should be forced to raise their wages. In turn, those workers should have more money that they use to buy clothes or restaurant meals or cars or whatever, and prices should rise across the board.
If you took economics, you would recognize this as the “Phillips curve” hypothesis. It is also just common sense. Except that it is not happening. Wage growth as of January (the last month for which data are available) was just 2 per cent over the previous year, a level that is hardly evidence of runaway inflation. In the United States, where the unemployment rate is a teensy 3.8 per cent, wages are rising at a surprisingly tame 3.2 per cent. In neither country (nor in many others) are workers apparently getting rich from the tight labour market.
So what exactly has happened to the Phillips curve/common sense scenario? A recent paper by the Federal Reserve Bank of Dallas takes a stab at the answer, more or less blaming it on technology but naming two manifestations of it: the rise of the gig economy and the advent of online shopping. According to the analysis by researcher John Duca, the two together are killing workers’ bargaining power and inflation at the same time.
Although there is a continuing debate as to how big the gig economy is in either Canada or the United States, there is little debate that we are seeing a shift away from full-time jobs (maybe with benefits) toward more and more people working multiple part-time jobs, doing contract work or being self-employed. Depending on your point of view, that is either an awesome trend toward self-empowerment or a recipe for poverty and social chaos. Either way, the changes in the labour market are clearly clouding the picture. The unemployment rate may keep moving lower, but it is not measuring the same kind of employment that existed a decade or two ago.
As for online shopping, well, the “Amazon effect” is not particularly difficult to understand. A paper from Harvard Business School presented to the Federal Reserve last summer raised the subject in regard to inflation, basically making the case that price transparency is more widespread than ever, making it increasingly difficult for any retailer to raise prices (they could, of course, but it is so easy to compare prices online that anyone who attempts it would quickly find customers slipping away). And price-transparency aside, Amazon is gargantuan enough that it is able to keep prices low all by itself. That may not make much difference to wages (outside of the retail sector anyway), but it is certainly a big factor in keeping overall inflation in check.
As the Dallas Fed paper points out, by itself neither this trend nor the rise of the gig economy would be enough to destroy the long-established relationship between inflation and employment, but together they seem to be doing the job. Whether this is a good news or bad news story really depends on your perspective. If the labour market is being remade and workers are losing their bargaining power, that is certainly an issue to be concerned about. But that is only part of the story.
Indeed, the really big story is that we seem to have decoupled the unemployment rate and the inflation rate, at least to some extent. That is a fairly blockbuster off-shoot from what is, of course, fairly blockbuster technology. It means that whatever wages workers do negotiate, they are not seeing their gains eroded by inflation at the pace they might have in the past. In turn, that also means that central banks may be able to keep interest rates lower for longer than would ever have seemed possible under the old rules.