In June, there were 43,600 people officially unemployed in Philadelphia County. At 7% the unemployment rate in Philadelphia is now a full percentage point higher than in June of last year. As the U.S. economy goes so goes Philadelphia’s economy so the news that U.S. growth in GDP during the 2nd quarter came in slower than expected despite the economic stimulus is a worrisome development.

On Tuesday, the Federal Open Market Committee (FOMC) of the U.S. Federal Reserve will meet to set the federal funds rate. One of the current voting members of the FOMC is Charles Plosser the President of the Philadelphia Federal Reserve.

Plosser has called for the FOMC to “act preemptively” and begin raising the federal funds rate to slow the economy because he is concerned about containing inflation.

He believes that inflation is already too high and fears that unless the FOMC acts to raise unemployment further, wages will begin to rise in response to recent spikes in food and energy prices. Rising wages would in turn set off a new round of price increases and lead to a wage-price spiral.

There is one huge problem with Plosser's view, there is no evidence that wages are beginning to accelerate, to the contrary wages in recent months are growing more slowly which is precisely what you would expect when employment is falling. It is important to remember that wages are sticky and therefore don’t quickly adjust to current labor market conditions so Plosser could be worried that recent spikes in food and energy prices will show up in wages a year from now. But here again the problem is that an economic expansion just ended in which wages and incomes for all but the wealthiest failed to keep pace with the growth in prices. Indeed in the last two and half decades the only time there has been sustained and broadly shared wage growth was when unemployment rates reached historic lows in the late 1990s.

In a recent speech Plosser responded to this kind of criticism with the following argument:

“In recent months I have heard some analysts suggest that the current economic situation is not like the 1970s because unions are less prevalent and there is no evidence as yet of a wage-price spiral. Thus, a weak economy, with rising unemployment and declining payroll employment, will presumably prevent workers from demanding higher wages. But, again, that story has things backwards. It is not demands for higher wages that kick off the spiral, but the loss of confidence that the central bank will keep inflation controlled, which, in turn, leads to a rise in inflation expectations. The wage-price spiral is not the cause of the inflation, but the result. This means that if monetary policymakers wait until they see the evidence of a wage-price spiral, they will be too late — the public will have lost confidence in the Fed’s ability to keep inflation under control, and this will make the job of bringing inflation down much more costly and difficult.”

As Paul Krugman has explained Plosser is of the view that wage growth is influenced by the growth in consumer prices. So in his view if the central bank signals it will do nothing about rising prices, workers will demand from their employers wage increases that match or beat the rise in inflation which is the first step in a wage-price spiral.

The alternative view is that wage growth is shaped by trends in the labor market. This means that spikes in commodity prices will not translate into rising wages. It is of note that most workers nationwide and in Philadelphia have lost ground against inflation not in just the last six months but in the last six years.

Of course this is not an academic exercise, Plosser is aggressively advocating taking steps that would slow the economy and push unemployment higher in Philadelphia. He is doing this even as most economic indicators are signaling a worsening rather than improving economic situation.

Is it too much to ask that such a policy stance require more than a gut feeling? There is no evidence that inflation in food and energy prices has begun to seep into other prices in the economy. The economic and social costs of unemployment especially in a city like Philadelphia are substantial and should have significantly more weight than the fear that inflation might–someday–maybe–perhaps accelerate.

--Mark Price

Unless you are Hillary Clinton, and refuse to bother with those "elite economists," things start looking dark.

This month, Harper's magazine published a 'sky is falling' article on its cover (uploaded here in pdf format, or read an abridged version here), stating that the economy is worse than we know. It charts how the calculation of government numbers (like the Consumer Price Index) has shifted and shifted again to make sure things look like they are moving in the right direction. For example:

[Nixon] proposed albeit unsuccessfully—that the Labor Department, which prepared both seasonally adjusted and non-adjusted unemployment numbers, should just publish whichever number was lower. In a more consequential move, he asked his second Federal Reserve chairman, Arthur Burns, to develop what became an ultimately famous division between "core" inflation and headline inflation. It the Consumer Price Index was calculated by tracking a bundle of prices, so-called core inflation would simply exclude, because of "volatility," categories that happened to he troublesome: at that time, food and energy. Core inflation could he spotlighted when the headline number was embarrassing, as it was in 1973 and 1974. (The economic commentator Barry Ritholtz has joked that core inflation is better called "inflation ex-inflation"—i.e., inflation after the inflation has been excluded.)

The adjustments continued: Reagan shifted the mechanism for accounting for housing costs, and pulled military servicemembers and suddenly classified them as 'employed' instead of outside the labor force. And then under Clinton, employment statistics shifted again:

Although expunged from the ranks of the unemployed, discouraged workers had nevertheless been counted in the larger workforce. But in 1994, the Bureau of Labor Statistics redefined the workforce to include only that small percentage of the discouraged who had been seeking work for less than a year. The longer-term discouraged—some 4 million U.S. adults—fell out of the main monthly tally. Some now call them the "hidden unemployed." For its last four years, the Clinton Administration also thinned the monthly household economic sampling by one sixth, from 60,000 to 50,000, and a disproportionate number of the dropped households were in the inner cities; the reduced sample (and a new adjustment formula) is believed to have reduced black unemployment estimates and eased worsening poverty figures.

This week the Inquirer wrote about just these people: outside of the statistics but not in a viable job. They talked to a former rower with a biochemistry degree who was laid off and is cobbling together work landscaping, financial consulting, and Ebay selling. And they talked to YPP's Mark Price about the gap between what the numbers show and how people are living here in the Philadelphia area:

As the bad economic news piles up, most people focus on the unemployment rate. But economists say these other measures of underemployment are also important indicators of economic distress. They tend to rise with unemployment, compounding the negative numbers. ....

Mark Price, a labor economist with Pennsylvania's Keystone Research Center, lists the ingredients for what he terms "the most liberal definition of unemployment": people who are unemployed and looking for work, people who want jobs but have given up looking for one, and people who have taken part-time jobs because they can't find full-time work.

These measurements provide the broadest measure of labor underutilization, according to Price.

Last month, 9.2 percent of the workforce fell into one of these three categories.

These are among the numbers to watch if economic woes deepen, especially because the job market never fully recovered from the recession of 2001, Price said.

The 9.2 percent, which better captures the lived reality of people trying to pull together paychecks that will pay their bills, is huge. Stark.

And the debate goes back and forth over whether violence has to stop before eonomic development occurs (see this weekend's New York Time Magazine on an anti-violence initiative that is modeled after attempts to contain contagious disease). But in 2005 almost forty percent of working-age African American men in Philadelphia were unemployed or outside the labor force (see page 8). It's that number, not the manipulated overall federal unemployment rate, that determines what life is like in communities like Philadelphia's:

Two University of Washington social demographers analyzed 1970 and 1990 census data to examine all forms of violent deaths in Chicago - homicide, accidental death and suicide - and determine whether race or economic opportunity was the key predictor.

"Both black and non-black communities show generally similar responses to endemic joblessness in terms of mortality," Gunnar Almgren, lead author of the study, said. "Race is not an explanation for differences in violent death rates. It's about jobs. If you isolate any group from jobs, it is going to have negative effects, and inner-city black-community levels of joblessness are higher than any other group."