The Congressional Record is a unique source of public documentation. It started in 1873, documenting nearly all the major and minor policies being discussed and debated.
“DOES WAGE INFLATION CAUSE PRICE INFLATION?” mentioning the Federal Reserve System was published in the House of Representatives section on pages H7347-H7348 on Sept. 7, 2000.
The publication is reproduced in full below:
DOES WAGE INFLATION CAUSE PRICE INFLATION?
The SPEAKER pro tempore. Under a previous order of the House, the gentleman from Washington (Mr. Metcalf) is recognized for 5 minutes.
Mr. METCALF. Mr. Speaker, I am going to speak on does wage inflation cause price inflation? That is a question that few have asked, even at the Federal Reserve Systems' Board of Governors.
Though wage inflation is presently utilized to aid in determining whether the Fed raises the interest rates or lowers rates or leaves rates the way they are, most have never heard of wage inflation until I spoke to this issue in a previous speech. Most still think it means that the wages of workers in the broadest sense are trending upward. Most think it just means workers are getting paid a little more, proof then of our booming economy.
Let me quote one recent headline from the Wall Street Journal:
``Unions Seek Big Pay Gains, Sparking Inflation Worries.''
In 1994, Layard and Nickell in their book ``The Unemployment Crisis'' stated this:
When buoyant demand reduces unemployment (at least relative to recent experience levels) inflationary pressure develops. Firms start bidding against each other for labor, and workers feel more confident in pressing wage claims. If the inflationary pressure is too great, inflation starts spiralling upwards: higher wages lead to higher price rises, leading to still higher wage rises, and so on. This is the wage price spiral.
This rather superficial explanation has been taken literally by many that should know better. But that would pose no problem should the idea itself remain in the cloistered walls of academia. But it did not.
When the Federal Reserve Board decided, along with Members of Congress and the White House, that price stability shall be of primary concern determining Fed policy, along with its clear mandate to keep real inflation under control using its mandated discretionary use of interest rates, this idea took hold.
We do know that Greenspan's Fed has looked at wage inflation as an indicator. Greenspan does not often call it wage inflation, but rather several different terms are offered up to explain the same thing, like this response to a Senate Banking member's question whether the Fed would raise the unemployment rate to something like five percent from its current level of four percent to achieve price stability.
Quoted in the Times:
I think the evidence indicating that we need to raise the unemployment rate to stabilize prices is unpersuasive. However, he was not sure and the issue was the subject of considerable debate among economists and Fed officials.
And it should also be of considerable debate among the Members of Congress. Greenspan's comments were made during late July of this year. Less than one week later, during the House Committee on Banking hearings I asked Greenspan if he thought it was proper to use worker's wages as an indicator at all. I asked him if he believed wage inflation was the cause of price inflation. Here, in part, are his contradictory remarks:
Wage inflation by itself does not. The issue basically is the question of whether wage inflation, as you put it, or, more appropriately, increases in aggregate compensation per hour are moving--are increasing at a pace sufficiently in excess of the growth and productivity so that unit labor costs effectively accelerate and generally drive up the price level.
Yes, precisely, that was what I said, does wage inflation, as I put it, because that is what Fed officials and economists call it, cause price inflation?
Greenspan then went on to add this:
The issue is, what you do not want to encourage are nominal increases in wages which do not match increases in productivity. Because history always tells you that that is a recipe for inflation and for economic recession.
Greenspan then, as is his custom, veered off course into a long discourse on topics nobody asked of him, closing with this final remark: ``Nor have we, as you indicated, chosen wages as some indicator of monetary policy. That is not the case.''
This is why many economists call this form of discourse Greenspanish, because he stated that wages, or, as he puts it, more appropriately, increases in aggregate compensation per hour, are looked at as an indicator that union labor costs effectively accelerate and generally drive up the price level.
So wage inflation does drive up the price level, according to Greenspan's Fed.
Does wage inflation, whatever it is, cause price inflation? That is the subject we need to go into.
____________________
