Will ‘Running the Economy Hot’ Really Help Workers?
The phrase sounds good, but there is a lot of confusion about what exactly it means.
Are they running too hot?
Photographer: Jared C. Tilton/Getty Images North AmericaIt’s an increasingly popular view, including within President Joe Biden’s administration, that the U.S. should allow labor markets to “overheat” to increase both employment and wages. It sounds like a good idea, especially after several decades in which ordinary workers have not always done well. But the economics do not withstand rigorous scrutiny.
One theory about the benefits of an overheated labor market stems from the work of Robert E. Lucas in the 1970s, which in turn built upon ideas from Milton Friedman. In Lucas’s model, if the central bank boosts the money supply and the rate of price inflation, some people will work more or expand their businesses because they think there is a real and enduring increase in the demand for their output.