The evolving impact of labour markets on monetary policy
DOI:
https://doi.org/10.15678/ZP.2018.46.4.02Keywords:
monetary policy, wage-price spirals, labour bargaining powerAbstract
Objectives: The aim of this paper is to address the cycle from monetary policy becoming the main instrument of macroeconomic stabilisation to the current unexpected decline in its effectiveness.
Research Design and Methods: This article analyses how preventing the risk of wage-price spirals unwinding became the main task of central banks. Such a perception of monetary policy role was a natural consequence of the Great Inflation of the 1970s and the substantial costs of disinflation of the 1980s. Then this paper highlights the causes behind the recent unexpected emergence of persistently low inflation. Among the most important causes of this were structural changes which took place also in labour markets, being the outcome of the twilight of traditional manufacturing and increasing globalisation.
Findings: The structural weakening of the bargaining position labour creates situation in which the period when monetary policy was focused on preventing wage-price spirals has ended. If advanced economies are entering a long period of low inflation and low interest rates, it will necessitate a reformulation of the role that central banks play in stabilisation policies.
Recommendation: This paper postulates that central banks should acquire a pivotal role in the macroprudential policy. The main argument is that the independence of central banks, which they obtained when fighting inflation, would increase the effectiveness of the macro-prudential policy.
Contribution: Usually success in lowering and stabilising inflation is attributed mainly to the changes in the way in which central banks have been conducting their monetary policy since the early 1980s. This article highlights the fact that the role which was played in this process by the substantial weakening of the labour bargaining position is still underappreciated.
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References
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Blanchard, O. J., Posen, A. S. (2015). Getting serious about wage inflation in Japan. Nikkei Asian Review, 15 December.
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Blommestein, H. J. & Turner, P. (2012). Interactions between sovereign debt management and Monetary Policy Under Fiscal Dominance and Financial Instability. OECD Working Papers on Sovereign Borrowing and Public Debt Management, 3.
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Ciżkowicz, P., Rzońca, A. & Torój A. (2015). In search for appropriate lower bound. Zero lower bound vs. positive lower bound under discretion and commitment. National Bank of Poland Working Paper, 215.
Coibion O., Gorodnichenko Y. (2015). Is the Phillips curve alive and well after all? Inflation expectations and the missing disinflation. American Economic Journal: Macroeconomics, 7(1), 197–232.
Decker, R. A. et al. (2016). Declining business dynamism: What we know and the way forward. American Economic Review, 106(5), 203–207.
De Grauwe, P. & Grimaldi, M. (2001). Exchange rates, prices and money: A long run perspective. Discussion Paper, University of Leuven.
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European Parliament (2016). Precarious Employment in Europe. Study for the EMPL Committee.
Fisher, I. (1933). Debt-deflation theory of the great depression. Econometrica, 1(4), 337–357.
Friedman, M. (1968). The role of monetary policy. American Economic Review, 58(1), 1–17.
Friedman, M. (1948). A monetary and fiscal framework for economic stability. American Economic Review, 38(3), 245–264.
Fukao K. et al. (2104). The structural causes of Japan’s lost decades. RIETO Discussion Paper No. 15-E-124.
Gagnon, E., Johannsen, B. J. & Lopez-Salido, D. (2016). Understanding the New Normal: The Role of Demographics. Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C., no. 80.
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Goodhart, C. A. E. (2017). Populism and Central Bank independence. CEPR Discussion Paper No. 12122.
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Hansen, A. (1939). Economic progress and declining population growth. American Economic Review, 29(1), 1–15.
Hausner, J. & Sławiński, A. (2018) “Central banks: hesitant guardians of equilibrium”, Acta Oeconomica, 68, issue supplement1, 125–139.
Heller, W. et al. (1976). Can we have full employment without inflation? Challenge, 19(1), 59–63.
Holston, K., Laubach, T. & Williams, J. C. (2016). Measuring the natural rate of interest: International trends and determinants. Federal Reserve Bank of San Francisco Working Paper, 2016–11, June.
IMF (2017). Understanding the downward trend in labor incomes shares. In World Economic Outlook, April 2017: Gaining Momentum? https://www.imf.org/en/Publications/WEO/Issues/2017/04/04/worldeconomic-outlook-april-2017.
Koo, R. (2016). The other half of macroeconomics and the three stages of economic development. Real-World Economics Review, 75.
Kuroda, H. (2015). Deflation, the labor market, and QE, Remarks at the Economic Policy Symposium Held by the Federal Reserve Bank of Kansas City, 23 August.
Kydland, F. E. & Prescott, E. C. (1997). Rules rather than discretion: The inconsistency of optimal plans. The Journal of Political Economy, 85(3), 473–492.
Lucas, R. E (1972). Expectations and the neutrality of money. Journal of Economic Theory, 4(2), 103–124.
Lucas, R. E. (2003). Macroeconomic priorities. American Economic Review, 93(1), 1–14.
McLeay, M., Radia, A. & Ryland, T. (2014). Money creation in the modern economy. Bank of England Quarterly Bulletin, 54(1), 14–27.
Mills, K. G. (2015). Growth & Shared Prosperity. U.S. Competitiveness Project, Harvard Business School.
Mishkin, F. C. (2000). From monetary targeting to inflation targeting: Lessons from the industrialized countries. Paper for the Bank of Mexico Conference Stabilization and Monetary Policy: The International Experience, Mexico City, 14–15 November.
Nelson, E. & Schwartz, A. (2007). The impact of Milton Friedman on modern monetary economics. Federal Bank of St. Louis Working Paper 2007–048.
OECD (2017). Policies for Growth To Benefit All. Paris: OECD.
OECD (2015). The Labour Share in G20 Economies. Report Prepared for the G20 Employment Working Group, Anatalya, Turkey.
Onaran Ő. et al. (2015). Working for the economy: The economic case for trade unions. Greenwich Papers in Political Economy, No. GPERC32.
Paris, P. & Wyplosz, Ch. (2014). The PADRE plan: Politically Acceptable Debt Restructuring in the Eurozone, Geneva Reports on the World Economy, Special Report 3, CEPR Press.
Phelps, E. S. (1967). Phillips curves, expectations of inflation and optimal employment over time. Economica, 34(135), 254–281.
Phillips, A. W. (1958). The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861–1957. Economics, 25(100), 283–299.
Porcellachia, D. (2016). Wage-price dynamics and structural reforms in Japan. IMF Working Paper, WP/16/20.
Posen, A (2015). Japan’s solution is to raise wages by 10%. Financial Times, 2 December.
Posen, A. S. (2012). The use and limits of monetary policy (whether conventional or not). Remarks for the CF-40-PIIE High-Level Conference, 20 April.
Romer, Ch. D. & Romer, D. H. (2002). A rehabilitation of monetary policy in the 1950s. NBER Working Paper No. 8800.
Schaltegger, Ch. & Weder, M. (2013). Will Europe face a lost decade? A comparison with Japan’s economic crisis. CREMA Working Paper No. 2013-03.
Sławiński, A. (2016). The role of the ECB’s QE in alleviating the Eurozone debt crisis. Prace Naukowe Uniwersytetu Ekonomicznego we Wrocławiu, 428, 236–250.
Sommer, M. (2009). Why are Japanese wages so sluggish?, IMF Working Paper, WP/09/97, May.
Summers, L. (2014). U.S. economic prospects: Secular stagnation, hysteresis, and the zero lower bound. Business Economics, 49(2), 65–73.
Szafranek, K. & Hałka, A. (2018). Determinants of low inflation in an emerging, small open economy. A comparison of aggregated and disaggregated approaches. NBP Working Paper No. 267.
Tarullo, D. K. (2017). Monetary policy without working theory of inflation, Hutchins Center Working Paper No. 33, Brookings Institution.
Tobin, J. (1982) Essays in Economics: Theory and Policy (The Papers of James Tobin, Vol. 3). Cambridge, MA: MIT Press.
Vandaele, K. (2018). Will trade unions survive in the platform economy? ETUI Working Paper No. 2018-05.
Wojtyna, A. (2004). Szkice o polityce pieniężnej. Warszawa: PWE.
Zavodny, M. (1999). Unions and the wage-productivity gap. Federal Reserve Bank of Atlanta Economic Review, Q2, 44–53.
Arbatli E. et al. (2016). Reflating Japan: Time to get unconventional? IMF Working Paper, WP/16/157.
Ball, E., Howat, J. & Stansbury, A. (2018). Central Bank independence revisited: After the financial crisis, what should a model central bank look like? M-RCBG Working Paper, No. 87, Harvard Kennedy School.
Bean, Ch. (2006). Globalisation and inflation. Bank of England Quarterly Review, 06/Q4.
Bednarczyk, J. (2016). Forward guidance (ogłaszanie zamiarów) jako narzędzie polityki pieniężnej. Finanse, 1(9), 35–47.
Bergeaud, A., Cette, G. & Lecat, R. (2014). Productivity trends from 1980 to 2012 in advanced countries. Document de Travail, 475, Bank de France.
Bernanke, B. (1999). Japanese monetary policy: A case of self-inflicted paralysis, www.princetion.edu.
Blanchard, O. J. (2017). The US Phillips curve: Back to the 60s? Peterson Institute for International Economics Policy Brief, January
Blanchard, O. J., Posen, A. S. (2015). Getting serious about wage inflation in Japan. Nikkei Asian Review, 15 December.
Blanchard, O. J. & Summers, L. (2017). Rethinking Stabilization Policy. Back to the Future. Peterson Institute for International Economics, 8 October.
Blommestein, H. J. & Turner, P. (2012). Interactions between sovereign debt management and Monetary Policy Under Fiscal Dominance and Financial Instability. OECD Working Papers on Sovereign Borrowing and Public Debt Management, 3.
Borio, C. (2015). Macroprudential frameworks: (Too) great expectations? In D. Schoenmaker (Ed.), Macroprudentialism. London: VoxEU.org Book, CEPR Press.
Buttiglione, I. et al. (2014). Deleveraging, What Deleveraging? Geneva Reports on the World Economy, No. 16, CEPR Press.
Cassel, G. (1936). The Downfall of the Gold Standard. Oxford: Calderon Press.
Ciminelli, G., Duval, R. & Furceri, D. (2018). Employment protection deregulation and labor shares in advanced economies”, IMF Working Paper no. WP/18/186.
Ciżkowicz, P., Rzońca, A. & Torój A. (2015). In search for appropriate lower bound. Zero lower bound vs. positive lower bound under discretion and commitment. National Bank of Poland Working Paper, 215.
Coibion O., Gorodnichenko Y. (2015). Is the Phillips curve alive and well after all? Inflation expectations and the missing disinflation. American Economic Journal: Macroeconomics, 7(1), 197–232.
Decker, R. A. et al. (2016). Declining business dynamism: What we know and the way forward. American Economic Review, 106(5), 203–207.
De Grauwe, P. & Grimaldi, M. (2001). Exchange rates, prices and money: A long run perspective. Discussion Paper, University of Leuven.
European Commission (2018). European Economic Forecast. Brussels, February.
European Parliament (2016). Precarious Employment in Europe. Study for the EMPL Committee.
Fisher, I. (1933). Debt-deflation theory of the great depression. Econometrica, 1(4), 337–357.
Friedman, M. (1968). The role of monetary policy. American Economic Review, 58(1), 1–17.
Friedman, M. (1948). A monetary and fiscal framework for economic stability. American Economic Review, 38(3), 245–264.
Fukao K. et al. (2104). The structural causes of Japan’s lost decades. RIETO Discussion Paper No. 15-E-124.
Gagnon, E., Johannsen, B. J. & Lopez-Salido, D. (2016). Understanding the New Normal: The Role of Demographics. Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C., no. 80.
Glyn, A. (2006). Capitalism Unleashed. Finance, Globalization, and Welfare. New York: Oxford University Press.
Goodhart, C. A. & Lastra, R. (2018). Potential threats to central bank independence. In S. Eijffinger & D. Masciandaro (Eds.), Hawks and Doves: Deeds and Words. Economics and Politics of Central Banking. London: VoxEU.org Book, CEPR Press.
Goodhart, C. A. E. (2017). Populism and Central Bank independence. CEPR Discussion Paper No. 12122.
Gordon, R. J. (2016). The Rise and Fall of American Growth. Princeton: Princeton University Press. Gordon, R. J. (2014) The demise of the U.S. economic growth: Restatement, rebuttal, and reflections.
NBER Working Paper No. 19895.
Gruber, J. W. & Kamin, S. B. (2015). The corporate savings glut in the aftermath of the global finance crisis. International Finance Discussion Papers no. 1150, Board of Governors of the Federal Reserve System, Washington D.C.
Hansen, A. (1939). Economic progress and declining population growth. American Economic Review, 29(1), 1–15.
Hausner, J. & Sławiński, A. (2018) “Central banks: hesitant guardians of equilibrium”, Acta Oeconomica, 68, issue supplement1, 125–139.
Heller, W. et al. (1976). Can we have full employment without inflation? Challenge, 19(1), 59–63.
Holston, K., Laubach, T. & Williams, J. C. (2016). Measuring the natural rate of interest: International trends and determinants. Federal Reserve Bank of San Francisco Working Paper, 2016–11, June.
IMF (2017). Understanding the downward trend in labor incomes shares. In World Economic Outlook, April 2017: Gaining Momentum? https://www.imf.org/en/Publications/WEO/Issues/2017/04/04/worldeconomic-outlook-april-2017.
Koo, R. (2016). The other half of macroeconomics and the three stages of economic development. Real-World Economics Review, 75.
Kuroda, H. (2015). Deflation, the labor market, and QE, Remarks at the Economic Policy Symposium Held by the Federal Reserve Bank of Kansas City, 23 August.
Kydland, F. E. & Prescott, E. C. (1997). Rules rather than discretion: The inconsistency of optimal plans. The Journal of Political Economy, 85(3), 473–492.
Lucas, R. E (1972). Expectations and the neutrality of money. Journal of Economic Theory, 4(2), 103–124.
Lucas, R. E. (2003). Macroeconomic priorities. American Economic Review, 93(1), 1–14.
McLeay, M., Radia, A. & Ryland, T. (2014). Money creation in the modern economy. Bank of England Quarterly Bulletin, 54(1), 14–27.
Mills, K. G. (2015). Growth & Shared Prosperity. U.S. Competitiveness Project, Harvard Business School.
Mishkin, F. C. (2000). From monetary targeting to inflation targeting: Lessons from the industrialized countries. Paper for the Bank of Mexico Conference Stabilization and Monetary Policy: The International Experience, Mexico City, 14–15 November.
Nelson, E. & Schwartz, A. (2007). The impact of Milton Friedman on modern monetary economics. Federal Bank of St. Louis Working Paper 2007–048.
OECD (2017). Policies for Growth To Benefit All. Paris: OECD.
OECD (2015). The Labour Share in G20 Economies. Report Prepared for the G20 Employment Working Group, Anatalya, Turkey.
Onaran Ő. et al. (2015). Working for the economy: The economic case for trade unions. Greenwich Papers in Political Economy, No. GPERC32.
Paris, P. & Wyplosz, Ch. (2014). The PADRE plan: Politically Acceptable Debt Restructuring in the Eurozone, Geneva Reports on the World Economy, Special Report 3, CEPR Press.
Phelps, E. S. (1967). Phillips curves, expectations of inflation and optimal employment over time. Economica, 34(135), 254–281.
Phillips, A. W. (1958). The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861–1957. Economics, 25(100), 283–299.
Porcellachia, D. (2016). Wage-price dynamics and structural reforms in Japan. IMF Working Paper, WP/16/20.
Posen, A (2015). Japan’s solution is to raise wages by 10%. Financial Times, 2 December.
Posen, A. S. (2012). The use and limits of monetary policy (whether conventional or not). Remarks for the CF-40-PIIE High-Level Conference, 20 April.
Romer, Ch. D. & Romer, D. H. (2002). A rehabilitation of monetary policy in the 1950s. NBER Working Paper No. 8800.
Schaltegger, Ch. & Weder, M. (2013). Will Europe face a lost decade? A comparison with Japan’s economic crisis. CREMA Working Paper No. 2013-03.
Sławiński, A. (2016). The role of the ECB’s QE in alleviating the Eurozone debt crisis. Prace Naukowe Uniwersytetu Ekonomicznego we Wrocławiu, 428, 236–250.
Sommer, M. (2009). Why are Japanese wages so sluggish?, IMF Working Paper, WP/09/97, May.
Summers, L. (2014). U.S. economic prospects: Secular stagnation, hysteresis, and the zero lower bound. Business Economics, 49(2), 65–73.
Szafranek, K. & Hałka, A. (2018). Determinants of low inflation in an emerging, small open economy. A comparison of aggregated and disaggregated approaches. NBP Working Paper No. 267.
Tarullo, D. K. (2017). Monetary policy without working theory of inflation, Hutchins Center Working Paper No. 33, Brookings Institution.
Tobin, J. (1982) Essays in Economics: Theory and Policy (The Papers of James Tobin, Vol. 3). Cambridge, MA: MIT Press.
Vandaele, K. (2018). Will trade unions survive in the platform economy? ETUI Working Paper No. 2018-05.
Wojtyna, A. (2004). Szkice o polityce pieniężnej. Warszawa: PWE.
Zavodny, M. (1999). Unions and the wage-productivity gap. Federal Reserve Bank of Atlanta Economic Review, Q2, 44–53.
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Published
2019-03-25
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Articles
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Open Access, licence: CC-BY 4.0
How to Cite
Sławiński, A., & Hausner, J. (2019). The evolving impact of labour markets on monetary policy. Journal of Public Governance, 46(4), 19-29. https://doi.org/10.15678/ZP.2018.46.4.02
