On January 8, 2020, I had the pleasure of attending the MIT Enterprise Forum of Texas Luncheon, held at the Federal Reserve building in Houston. One of the speakers there was John Duca, Vice President of the Federal Reserve Bank of Dallas and professor of economics at Oberlin College.
After the luncheon, I had a chance to speak with Dr. Duca about some pressing economic issues and he suggested I read his paper: “Inflation and the Gig Economy: Have the Rise of Online Retailing and Self-Employment Disrupted the Phillips Curve?”. John Duca is obviously a very well trained economist; but, I have some problems with this paper that claims the natural rate of unemployment is a moving target. I do not disagree with the claim – I disagree with how it is proven.
Above is an example of a Phillips curve. It is a theory supported by data and it claims that inflation goes up as employment goes up. That makes sense. The tighter the job market, the more that employees can bid up wages. Somewhere on that curve is the natural rate of unemployment, also known as full employment – they mean the same thing. In other words, the point where anyone can quit one job and find another pretty fast.
In Dr. Duca’s Figure 5, he displays the results of his research. Separate Phillips curves are given for 1990, 2007, 2018. He claims that the reason the Trump economy has such high employment and no inflation is because the natural rate of unemployment is shifting downward – that point is where the line crosses the “x” axis. Remember, when unemployment drops below the natural rate of unemployment, you start to get inflation.
Why is it shifting? It is shifting because more and more people are being forced to do “consulting”. Duca agrees that this is a sign indicating a loss of worker bargaining power in the market place. How many people do you know that had to start working 1099 because of layoffs?
The problem I have with Dr. Duca’s work is that he is assuming the economy is at full employment. He then uses the data and math to prove his case. Would it not be better to have an independent way to prove what the level of full employment is and then build a theory to fit that? The truth is that not everyone in the Federal Reserve believes they know what that number is. Discouraged workers are not counted in that number because they have stopped looking for work. What would that number look like if we adjusted for illegal immigrants taking our jobs, or people who are fired and replaced with H1B visas from Asia? How about all the people that have lost hope and turned to selling drugs, firearms, and perhaps, even themselves?
Assume you have a PhD in English and the only job you can find is working on a paper route delivering news papers – then the government considers you as fully employed. Dr Duca announced that the payrolls are up. This number, he admits, does not discriminate between legal citizens, illegal aliens, nor legal immigrants. What good are all the economic calculations when the numbers do not reflect the quality of life in that economic system? A recently unemployed engineer that is forced to start a lawn service company and must compete with illegal aliens to cut your lawn (with no bargaining power) is not suddenly “fully employed”.
So, I guess the new Trump Economic Theory of Relativity has been validated again. The natural rate of unemployment does change relative to which Phillips curve you are on (reference frame). I wonder if that means we are approaching the speed of light?
Read the full paper here: https://www.dallasfed.org/~/media/documents/research/papers/2018/wp1814.pdf