In her acceptance speech for Fed Chair, Janet Yellen said… (at the 1:30 point in this video from The Daily Conversation)
“The mandate of the Federal Reserve is to serve all of the American people”
And then it appears as though she almost choked on those words. She must sense the rage and power seething among people, especially the young and underpaid. or she senses the embarrassment of an economy gone elitist. It would be nice if the Federal Reserve could do more to help people, but what can the Fed do?
“The Federal Reserve can help, if it does its job effectively. We can help insure that everyone has the opportunity to work hard and build a better life.”
Many people already work hard and don’t get ahead in life.
The problem she faces is that there is no transmission mechanism to put money into the hands of people. Many people are simply marginalized from the economy. They can’t get loans. Wages are stuck. Social programs are in jeopardy. A lack of aggregate demand is keeping unemployment high. And labor has no bargaining power, not even with the government.
She wrote a paper on efficiency wages back in the 1980’s. The idea of efficiency wages justifies the going wage rate and does not address what a socially optimal wage would be.
She writes in her paper on efficiency wages…
“However, for a natural but subtle reason, the efficiency-wage model is consistent with nominal wage rigidity and cyclical unemployment.”
“In the Akerlof-Yellen model, firms are efficiency-wages setters and monopolistic competitors. In the long run, wages and prices are set by all firms in an optimal way. In the short run, in response to aggregate demand shocks, some firms keep nominal wages and prices constant, while other firms choose these variables optimally.”
What she wrote back in the 1980’s would lead me to think that she trusts firms to set appropriate wages. She would not question how or why firms set the wages that they do. And yet, she must know that firms have private interests as their priority, not social interests. Then how can she trust that wages will be optimal? Does she mean optimal for firms? But what about optimal for society?
She said nice words yesterday, but there is nothing that she can do short of stating a case for higher wages.
Ben Bernanke never gave much weight to the idea of raising wages. He felt that people needed to raise their skill level and education. But now we see many college graduates not finding appropriate jobs. Somewhere he got it wrong.
I have no hope that she will do anything to help labor directly. All her actions will help firms directly, and labor indirectly, if labor is so lucky. But then again, she says that firms set wages in an optimal way. I doubt she understands that firms have been taking advantage of their power to suppress wages over the years in a sub-optimal way for the overall economy.
So… To expect that Janet Yellen will do anything directly to help labor would be expecting too much.