Source: Atlanta Federal Reserve

The standard narrative about the stock market correction claims that bond yields are about to go through the ceiling and blow up the equity market, as capacity constraints in a growing economy lead to shortages, bottlenecks, and inflation.

There simply isn’t any evidence for this.

The inflation-expectations component of bond yields, to be sure, has gone up, but it’s gone up by less than we would expect given the modest recovery in the oil price. The cost of the single most important production input in a service-based economy is labor, and the best measures of labor costs show a decline in the growth rate of wages rather than an increase during the past six months. The Atlanta Federal Reserve uses the Bureau of Labor Statistics’ survey of households to construct wage indices that reflect developments in different industries, adjusted for part-time or full-time employment. Economists generally think that the Atlanta data is a more reliable indicator than the monthly data for average hourly earnings reported by businesses.

As the chart makes clear, the Atlanta Fed’s wage data show declines, particularly in the most labor-intensive sectors, such as health care and leisure/hospitality. Given continued hiring and spot shortages of skilled labor, why should this be the case? Part of the answer lies in the Uber-ization of service employment. The S&P 500 has stopped hiring. In fact, total S&P 500 employment peaked in the 4th quarter of 2015 at 25.150 million employees; it now stands at 25.025 million employees. Big companies outsource a growing portion of administrative functions.

Uber had the clever idea that drivers with their own cars would accept lower pay than full-time cabbies in return for flexible hours. Corporations discovered that skilled personnel with their own home and computers would accept lower pay for admin work in return for flexible hours. In particular, there are millions of women with skills who would like to work flexible hours while they care for children. Structural changes in the labor force of this kind do not constitute an improvement in productivity — output per manhour is the same — but rather a change in behavior.

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