[Congressional Record Volume 146, Number 103 (Thursday, September 7, 2000)]
[House]
[Pages H7347-H7348]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




               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

[[Page H7348]]

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.

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