Mary Daly, senior vice-president at the Federal Reserve at her office in San Francisco. Daly delved into one of the biggest mysteries of the six-year economic recovery: with unemployment rapidly declining from a peak of 10%, why have wages been slower to accelerate than economic theory would suggest? Daly’s work sheds light on “questions of central importance to policy makers,” Fed Chair Yellen said.

Bloomberg/Washington

Mary Daly dropped out of high school at 15 and supported herself delivering donuts. Now the 52-year-old Ph.D economist is helping shape Janet Yellen’s understanding of the job market.
As associate research director at the San Francisco Federal Reserve, Daly delved into one of the biggest mysteries of the six-year economic recovery: with unemployment rapidly declining from a peak of 10%, why have wages been slower to accelerate than economic theory would suggest?
Daly’s work sheds light on “questions of central importance to policy makers,” Fed Chair Yellen said in an e-mail. Officials are looking for a pickup in pay pressures that might feed through to inflation before raising interest rates from near zero, where they’ve been since 2008.
Daly’s interest in economics was informed by her experience growing up in Ballwin, Missouri, about 20 miles from St Louis, the daughter of a postman and a stay-at-home mother.
“People lived on such a margin that they lived or died based on whether their job fell through,” she said in an interview. “That made me really interested in the labour market, interested in how people could be on this knife’s edge, of climbing up the economic ladder or falling down into the trench.”
Her family life unravelled as her parents divorced and their four children dispersed. After leaving school, Daly began living on her own at 16. She drove a donut delivery truck to make ends meet, along with working at a deli and in the lingerie department of a local big-box store.
“My aspirations at that time were to get a better department at Target,” she said in an interview.
That’s when an adult friend and mentor Daly had met through her high-school counsellor stepped in. Psychologist Betsy Bane urged Daly to complete her high-school-equivalency GED, then persuaded her to take a semester of classes at the University of Missouri at St Louis, and later to attend the school’s Kansas City campus full-time.
“She blew the top off of the GED without too much preparation,” Bane said. “She’s just bright, bright, bright, and curious. I thought, ‘What a waste if she doesn’t get a degree.’”
Bane’s encouragement “kind of opened up my world,” Daly said. “At all junctures, you’re going to need mentors, and at all junctures, you need a hand up.”
College was a tough adjustment, and as she tried to balance school and work, Daly was failing two classes midway through her first semester. Seeing her struggle, an academic counsellor got her moved to a tutoring position for work-study. Through teaching others, Daly learned how to study well herself.
She also became interested in economics, following her curiosity first to a master’s degree at the University of Illinois at Urbana-Champaign and then through a doctoral program at Syracuse University in New York.
After completing post-doctoral research at Northwestern University, Daly started as an economist at the San Francisco Fed in 1996. At first, she wasn’t sure how her expertise, focused on individuals and individual companies, would fit into an institution dedicated to assessing the broader economy.
She found ways to build bridges, helping start a conference series focused on using microeconomic research — which covers topics from wage fluctuation to household inflation expectations — to inform macro policy.
When Yellen, herself a labour economist, became San Francisco Fed president in 2004, Daly’s policy relevance increased.
Yellen asked for a national labour-market update as part of her briefings on the economy ahead of meetings of the Federal Open Market Committee, the policy-making body made up of Fed governors and regional bank presidents.
“I’d been itching, I’d been leaning on my department to change” and bring more microeconomics to the table, Daly said. Now, she was regularly updating the regional bank’s president on national issues. Yellen “just opened the floodgates.”
Then came the 2007-2009 recession. Unemployment peaked at 10%. As the labour market began to recover, macroeconomic models didn’t appear to explain what was happening. The decline in unemployment didn’t bring about the rise in wages that historical patterns seemed to predict.
That’s where Daly came in.
In a January 2014 paper, she and colleague Bart Hobijn used hourly earnings data to show that so-called wage rigidities, in which employers avoid cutting wages in a downturn and are slow to raise them in its aftermath, may have held down pay inflation following the last three recessions. They created a simple model showing the changed relationship.
The findings made a splash. When asked during a March 27 speech in San Francisco what research papers she’d been thinking about and discussing with colleagues, Yellen cited the work.
Daly’s findings haven’t gone uncontested. A new Federal Reserve Board paper by Ekaterina Peneva and Jeremy Rudd finds employers weren’t as reluctant to cut wages during the recession as Daly and Hobijn’s results implied. Peneva and Rudd based their findings on a different model and a separate data set.
As Daly’s work provokes additional research, “we’ll get greater and greater clarity around this,” said San Francisco Fed President John Williams. Researchers didn’t fully understand the implications of the rigidities before, he said.
“I think that could have a powerful influence,” said Jonathan Willis, vice president and economist at the Kansas City Fed. “If we understand better that when you have a severe recession, you’re going to have these shifts and wages can’t decline, that might influence how policy makers think about stabilisation policies in times of severe recession.”
Daly said she plans to continue prying into what affects wage growth and studying whether the social safety net fits with today’s economic realities. She’s helping start a series of podcasts to make Fed research accessible to a wider audience.
“One of the things we call her is the people’s economist,” said her collabourator on the podcasts, Jody Hoff, who works in economic education at the regional Fed. “She knows what it’s like to live paycheck to paycheck, to be intimidated by going to college, and that everydayness about her absolutely masks her accomplishments.”
Daly takes pride in being a mentor, said Natasha Nicolai, who was Daly’s physical therapist. When Nicolai, 33, was yearning for a career change, Daly introduced her to public policy research. She has since graduated from the University of California at Berkeley’s graduate public policy program and now works at the research group Mathematica.
Daly is working to give other young people the wherewithal to start their studies. Daly and her partner of 25 years, clinical psychologist Shelly Frank, have been helping fund scholarships at universities Daly attended.
Daly has mastered the art of sussing out what policy questions need to be answered and tackling them in a timely manner, Williams said. Her role as a mentor — and a role model — is also shaping her legacy at the Fed, he said.
“Economics is a male-dominated field, we all went to these top schools, it’s very insular in many ways,” Williams said. Daly’s example is “very inspirational for people: It’s not about the diplomas on your wall. It’s about what you do, and what you add.”