Greg Mankiw has an interesting post on what would make a good inflation target (ht CPW). According to work by Ricardo Reis and himself, aiming at the nominal wage is a good way of ensuring the highest degree of price stability – according to models calibrated to recent US data (paper here *).
Using this conclusion he shows a graph of private hourly compensation growth and states that inflationary pressures in the US are not as much of a threat as some analysts are positing.
If the same implication held in New Zealand (which there is no assurance of), how would we be looking:
Source, QES wage data Statistics New Zealand (*)
Not so good it seems 
3 comments
Andrew says:
June 25, 2008 at 11:20 am (UTC 12 )
I dunno, it just seems wrong to directly target the nominal wage without accounting for real growth.
Matt Nolan says:
June 25, 2008 at 11:41 am (UTC 12 )
“it just seems wrong to directly target the nominal wage without accounting for real growth”
I have a concern about that as well – I wonder how real wage growth-productivity growth would do as a variable.
The one advantage that stems from looking at wages ahead of a CPI index should come from a clearer idea of general price pressures instead of relative price pressures. Of course this assumes that relative prices in the labour market are less variable than in the goods market – is that the case?
Another advantage stems from the fact that we are targeting sticky prices in the economy – which are the ones we are concerned about for inflationary pressures (as the flexible ones are only reacting to relative price movements). As a result, it makes theoretic sense that a sticky price target would be better than a composite flexible-stick target such as the CPI.
However, I think Mankiw builds an index rather than just targeting wages as he realises that there is more to it.
CPW says:
June 25, 2008 at 2:07 pm (UTC 12 )
Lots more food for thought from knzn on targeting unit labour costs: here and here
This version might be a bit easier to sell politically too as it doesn’t carry the connotation that the central bank is “limiting” wage growth to a target.