In August 2014, then-Federal Reserve Chairman Janet Yellen described the wage dilemma in some detail. She was still relatively new to the job at that time, and there was pressure on her from among the so-called hawks to more aggressively normalize monetary policy. Ben Bernanke had taken the more cautious approach having experienced what both he and Yellen would afterward characterize as “false dawns.”

In terms of the tepid wage growth to that point, it didn’t matter that the media was in a frenzy over the “best jobs market in decades.” Labor gains seemed impressive numerically for the Establishment Survey, yes, but even in 2014 they weren’t all that impressive when properly couched in percentage terms (and nothing like the nineties, let alone the eighties).

So, when she went to Jackson Hole that year she played both sides. First, the more obvious reasons for caution:

This pattern of subdued real wage gains suggests that nominal compensation could rise more quickly without exerting any meaningful upward pressure on inflation. And, since wage movements have historically been sensitive to tightness in the labor market, the recent behavior of both nominal and real wages point to weaker labor market conditions than would be indicated by the current unemployment rate. [emphasis added]

This is traditional Phillips Curve stuff. The labor market could improve and accelerate further without generating any wage inflation, and therefore consumer price inflation. To that point, compensation data suggested there was still enormous labor market slack no matter all the emphatic rhetoric.

The balance of risk on the other side, however, was something called “pent-up wage deflation.” The Great Depression was the last declared depression for a reason; American businesses historically at the onset of economic contraction had slashed wages as well as payrolls. This was the epitome of vicious deflation.