Anyone expecting to have an interview at PIMCO will want to read chief economist Paul McCulley‘s latest essay, Principled Populism, because he goes through some of his favorite questions to trip people up, along with what you absolutely shouldn’t say. (A knowledge of Keynes’ General Theory and the presence of mind not to tell prospective employers that you’re untrustworthy will help).

The newest question on the list: “How does a nation’s productivity growth become real wage growth for ordinary citizens, in the context of low inflation and moderate long-term interest rates?”

Rich’s Ratio and real wages

McCulley says that the only way to bring wages up post-Volcker’s war on inflation is through a sustained period of economic growth, something that he talks about in terms of Rich’s Ratio (courtesy of his colleague Rich Clarida.

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The basic argument is that labor doesn’t start to make real gains until the expansionary part of the business cycle, well after the initial recovery, but that those gains last at least partially into the next recession. So if you’re main goal is to help labor, you want the expansion to run for as long as reasonably possible.

Yellen will let Rich’s Ratio climb: McCulley

Since we’re talking about PIMCO, the upshot has to be some way to better understand the bond market, and McCulley argues that since this is clearly one of Federal Reserve chair Janet Yellen’s goals, we should anticipate her policy decisions to fall in line. Rate hikes have often been used in the past to prevent the economy from overheating and to keep inflation in check, but the many decade secular battle against inflation has been a success. Yellen has plenty of room to let Rich’s Ratio run, satisfying part of her mandate to labor market, before she has to worry about inflation getting so high that immediate action is necessary.

“The Fed would love to see a long bull market in Rich’s Ratio. The war on inflation was won long ago, and the time has come for a peace dividend paid to labor,” he writes.

As much as some market participants might not like this approach, McCulley points out that having an inflation rate cyclically above the Fed’s 2% secular target when the next recession hits (he isn’t making any predictions) gives us more of a buffer against deflation and could give policymakers more room to maneuver in the future.