The Labor Effect of the ECB’s Monetary Policy

Previous chapters gave a new overview that also further substantiate a direct role for MP on output (GDP growth) in the euro area (4.1.1, 4.1.2, 4.3.4): monetary growth, velocity, low interest rates, and the right timing and amplitude of MP seem to be crucial, as well as the efficiency of the total monetary transmission that cannot be altered much by the ECB.

The modified, the modern, and the standard Phillips Curves do not show a very striking de-pendency as a rule of the employment level and inflation in the EMU from 1999-2015 (e.g.

6 Figure S16). Only if only non-crisis years are considered (e.g. 2003-2007) it shows such a Fisher-Phillips dependency (6 Figure S16). Having established a link between monetary ag-gregate growth and GDP, and having uncovered an effect of velocities on output that oc-curs in approximately a ‘one-quarter-tow-bar’ (see 4.1.2) the research can now ask the question if the overall employment level (job creation) depends on the velocity too.

The employment rate is one of the most important political and economic factors and indi-cators and serves as a suitable read-out of high relevance for MP, fiscal and economic poli-cy, and indicates both ‘health and stability of an economy’ and economic growth potential.

Figure 51 co-depicts and correlates for the first time (in 7-2015) the growth rate of the in-come velocity of real money (v0) and the growth of the unemployment rate (in %) in an overlay chart analysis, for the EMU. An inverse correlation between both growth rates can be shown (R=-0.22) even in the noisy, quarterly unadjusted, raw data set. This further con-firms that the velocity of money is indicative for job creation as well as output (4.1.2). It lays down a new inverse coherency of the velocity of money and the short-term employment and economic growth trends in their respective ‘mirror-inverted natural mean function’.

This finding can be used by MP strategists to prevent unnecessary ‘frictional’ unemplo y-ment by better adjusting the velocity’s growth rate in real-time to stay within an optimal corridor, and for short-term employment forecasts (related research was still missing).

In summary, a rising velocity benefits the economy, job creation and acts anti-deflationary.

The rising debt level (see 4.1.5) depresses natural velocities, the economy, jobs, and prices.

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Figure 51 Reciprocity between the Growth Rate of the Velocity of the Monetary Base (v0) and the Seasonal Adjusted Unemployment Rate in the EMU from 1999-2015

Until 2009-Q1 wages were growing in accordance of domestic growth policies that could have led to much more future growth and millions of new jobs (EU calculations) (EC 2008).

Figure 52 Unit Labor Costs and its Deviation from Wages and Labor Productivity

After the FC, indicators and velocities dropped sharply, and employment and wages begun to slow down. Labor productivity growth rates started falling and unit labor cost (ULC) were soaring, like local factor competitiveness. Labor productivity and wages, ULC, and so on, trended more suitably before the FC in 2009. The ULC trend resembles the quarterly devia-tion of wages (as moving average) and labor productivity from 2001-2015 (see Formula 46).

Formula 46 Unit Labor Cost Dependence on Wages and Labor Productivity in the EMU

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Entry: ULC: unit labor costs, based on quarterly ECB data (in line with economic theory)

M₁ and thus v₁ has a relevant role with high monetary dimensions effective for the labor market: thus, the effect of a second grade velocity v₁ shall be tested with respect to its de-pendency (Pearson’s correlation) on labor market stats: including the employment growth rate (in % p.a.), the labor productivity growth rate (in % p.a.), the unit labor cost growth rate (in % p.a.), and the wage growth rate (also in % rate p.a.). Table 7 shows the results:

Table 7 Correlation of Velocity, Employment, Labor Productivity and Wages Growth

The highest correlation is an inverse relationship between labor productivity and unit labor costs (see Figure 52), also due to the relationship given in Formula 46. The second highest dependency was found for the labor productivity rate and the employment rate. The corre-lation is strongly positive as it is leveraged by capital and technology. A negative shock to consumer demand and investment contributed to the negative effect in the FC. The third highest correlation level is found between unit labor costs growth rate (in %) and the em-ployment rate (% reduction of unemem-ployment) - a quantitative measure of how much the unit labor costs influence the employment function in the euro area. This correlation of -0.68 indicates a strong inverse dependency also due to the relatively high costs of living in the EMU. The fourth highest correlation, still R=0.64, is a positive dependency of v1 (real velocity of M1, see 4.1.2) and labor productivity: the velocity of M1, v1, grows with labor productivity. There is also a dependency (R=-0.52) between v1 and unit labor cost, and v1

and employment (R=0.42). If v1increases (it doesn’t in the long run) then labor productivity increase too, labor costs would fall - same as unemployment. However, all predictions of today convey that v1 is still about to slightly fall throughout the next decades (see Figure 9).

This might cast a cloud over future labor productivity trends as the ECB’s MP is very co n-sistently planning, or can’t circumvent, slightly lower v1 growth rates in the future. Veloci-ties are declining due to a higher debt burden, lower marginal propensity to consume mul-tiplier effect for output, less job growth, and lower wages and ULC. This strongly urges po-litical decision makers to withstand the trends: basically with less debt and MS reform.

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The fifths highest dependency (R=0.63) could be revealed for wages and unit labor costs.

This only indicates that wages significantly contribute to production and factor costs. Wag-es are only slightly negatively correlated with employment and labor productivity (R=-0.3), due to the effect of outsourcing of mass production into cheap labor countries. Finally it is also important to have a brief look at the price-wage ratio. This indicator tells something about the real purchasing power (PP) of the working population: this ratio is slightly declin-ing at -0.61% per annum, meandeclin-ing: PP of wages is marginally accretive. Firms that optimize their profits hire until the MPL (marginal product of labor) equals the real wage (Mankiw 2014). This means the real wage must fall or the MPL must rise in the EMU. High debt levels cause deflation that drives the real wage (via P) and lowers the MPL.

Figure 53 Correlation of v1, labor Productivity and Employment Rate

Figure 54 Price-to-Wage Ratios and the Velocity of Money

The trend of prices correlates with wages resembling a referencing of price and wage poli-cy. Price/wages ratio also correlates with the velocity of money (v1, v2, v3, v0) but the in-come velocities of money fade faster, e.g. v2: 2.58% p.a. (Figure 54). Even though the popu-lation benefits from these economic trends effectively by ca. 10% higher purchasing power

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per 15 years, homogeneity of purchasing power dispersion falls, and a growing pool of money is not used real TA purposes and GDP, as income velocities keeps falling: slightly but continuously lowering some strength of the potentially starching domestic markets.