Is wage growth on an upward trend? Cleveland Fed economist notes some difficulties in forecasting
Recent signs, such as shrinking slack in the labor market and reports from businesses on their wage plans, suggest that wage growth may finally be picking up, says Federal Reserve Bank of Cleveland vice president and economist Edward S. Knotek II. But Knotek cautions that forecasting the trend for wages going forward is difficult.
To illustrate, Knotek generates forecasts for growth in the Employment Cost Index (a measure of wages and salaries along with benefits) from three different models: a medium-scale statistical model which uses the unemployment rate, inflation, and other macroeconomic data series; a simple model that uses information from a National Federation of Independent Business (NFIB) survey of small businesses’ wage plans to predict future growth in the ECI; and a random walk model, which assumes that future year-over-year ECI growth will be equal to its most recently observed value.
Examining the historical forecast accuracy of the three models, Knotek finds that the random walk model has been the most accurate. This suggests, says Knotek, that movements in compensation growth—which depend on a complex combination of labor market slack, bargaining power, worker productivity, inflation, and myriad other factors—have been essentially unpredictable since the mid-1990s.
The researcher notes that these difficulties in forecasting labor compensation provide at least some evidence for why, when forecasting inflation, wages often appear to have little predictive power.
Read Difficulties Forecasting Wage Growth
Cleveland Fed researchers also looked at Interest Rate Forecasts in Conventional and Unconventional Monetary Policy Periods. Mehmet Pasaogullari and Nelson Oliver found that the Fed's commitment to hold the federal funds rate low and forward guidance helped to improve the accuracy of rate forecasts.
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
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