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Wage Flexibility in Texas May Ease Impact of Tighter Monetary Policy, Says Dallas Fed

New Southwest Economy also highlights Texas exports, Houston economy
and Mexico’s regional economic differences

DALLAS — Wages are more flexible in Texas than in other parts of the U.S., so the state’s unemployment rate will be less likely to rise than elsewhere when interest rates increase, according to the latest issue of the Federal Reserve Bank of Dallas’ Southwest Economy.

The Phillips curve—which illustrates the inverse relationship between unemployment and wage growth—is steeper in Texas compared with the nation, writes senior research economist Anil Kumar in “Wage Flexibility in Texas May Ease Impact of Tighter Monetary Policy.”

With a steeper Phillips curve, Texas wages are more responsive to changes in the unemployment rate and adjust more freely, Kumar states. This suggests Texas will experience a smaller increase in labor market slack when interest rates rise.

Exports remain crucial to the Texas economy, accounting for 17 percent of total Texas economic output, write Janet Koech, assistant economist, and Mark Wynne, vice president, in “Texas Maintains Top Exporter Standing While Its Trade Remains Concentrated.”

Overall, Texas—the nation’s top exporting state—sold $288 billion worth of goods overseas in 2014, the authors state. However, Texas ranked 37th among the states in terms of diversification of trading partners last year.

Export products are more diversified in Texas than the nation on average but more concentrated than they are in California and some other states, the authors find. Exports of chemicals, computers and electronic products, and petroleum and coal products account for half of total Texas exports.

This quarter’s “Spotlight” article focuses on the Houston economy, which so far has been spared a recession despite significant job losses in manufacturing and oilfield services.

A Dallas Fed model that assumes a 30 percent decline in exploration and production capital expenditures—as occurred in the first quarter of 2015—supports the idea that the region’s economy is diverse enough to weather another oil bust.

In “Mexico’s Four Economies Reflect Regional Differences, Challenges,” business economist Jesus Cañas and research assistant Emily Gutierrez say Mexico’s affluent northern region is characterized by a large manufacturing base, which sharply diverges from the poverty-stricken south, a hub of energy activity.

The country’s central region benefits from the sprawling reach of Mexico City, they note. The agriculturally driven north-central zone makes a smaller economic contribution.

“Economic expansion in the south, with its high poverty levels and labor informality, will continue to lag behind the nation,” the authors write. “However, recent labor, energy, financial and fiscal reforms could help close the gap in the medium to long term by increasing investment and labor mobility.”

This issue of Southwest Economy also includes an “On The Record” conversation with Mark Wynne, director of the Globalization and Monetary Policy Institute, who says Greece is facing an “economic trauma” comparable to the Great Depression of the 1930s in the United States.

Wynne says there is a scenario in which Greece leaves the euro, “but it would do little to fix the deeper problems Greece is wrestling with and could prove to be destabilizing for the rest of the euro area and for the global economy.”

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Media contact:
Justin Jones
Federal Reserve Bank of Dallas
Phone: 214-922-5449
Email: Justin.Jones@dal.frb.org