Reviews | Don’t blame workers for inflation
Inflation is rising and wages are rising. Average hourly earnings of production workers and non-supervisors rose 5.5% in the 12 months to September, the highest since 1982, except for a few other months in the pandemic.
But don’t blame rising wages for inflation. I have two charts which show that workers are the victims of inflation, not the culprits.
The classic story of inflation is that when the job market is tight, workers demand higher wages, forcing employers to raise their prices, making workers want even higher wages, and so on in a vicious cycle.
Part of this story is true: There are more than 10 million unfilled jobs in the United States, according to the Bureau of Labor Statistics. The percentage of people leaving their jobs – a measure of confidence in their ability to find work – hit an all-time high in August.
But for some reason, workers on the whole fail to extract much more money from their employers.
The first graph shows the inflation-adjusted cost of employment index for total compensation, which includes wages and salaries as well as benefits such as health insurance. It covers all workers, not just production workers and non-managers. The index is not influenced by job changes between occupations and industries – which means that it does not decline by a month if suddenly many low-paid workers are hired in the hospitality industry. As labor costs have increased more slowly than consumer prices, the index has actually fallen.
My second graph shows that workers’ hourly output has increased faster than their wages. This results in a decrease in the unit labor cost, which is an index of the production of goods and services divided by the cost of the labor required to produce that output.
It should come as no surprise that labor productivity remains strong. U.S. gross domestic product has rebounded above its pre-pandemic peak, while the number of employed workers remains millions below the pre-pandemic level. It just says that output per worker has increased. Which is good for employers. This means that they don’t need to raise prices to cover higher labor costs.
So we have workers’ compensation that does not follow inflation and workers’ compensation that does not follow increases in workers’ productivity. This clearly proves that workers are more guilty than guilty when it comes to inflation.
This may not remain the case, however. Workers will not be patient forever if inflation continues to erode their take-home pay. Granted, many of the items that have driven inflation up over the past year, like gasoline and used cars, won’t stay expensive forever. But wage inflation tends to persist as workers’ expectations anchor at a higher level.
Economists disagree on the extent to which workers’ incomes will ultimately affect the general price level. “Wage growth reflects a re-leveling of low wages rather than the start of a price-wage inflation spiral,” Oxford Economics wrote in a note to clients on Thursday. But Conor Sen, the founder of Peachtree Creek Investments, points out in a Bloomberg Opinion column that it doesn’t necessarily take higher wages to put pressure on prices. It would suffice for more people to return to work, thus increasing the total purchasing power of consumers.
I interviewed James Sweeney, the chief economist at Credit Suisse, on Wednesday, the day the Bureau of Labor Statistics announced that consumer prices had risen 5.4% from the previous year. He said he expects that after the end of the pandemic gyrations, the annual rate of increase in the personal consumption expenditure price index will stabilize around 2.3%, which would be around half a percentage point above the average since 1995. Two factors in accelerating inflation: higher housing costs due to pent-up demand and limited housing supply, and labor costs -higher labor due to the narrowness of the low wage market. (The high-wage sector of the labor market is always tight, he said.)
It seems plausible. A persistent inflation rate of 2.3% in the Federal Reserve’s preferred measure would annoy the Fed, which is targeting 2%. But that would be way below the numbers that made the headlines this week. And if that’s in part because the workers at the bottom of the wage pyramid fare better, well, it gets worse.
Regarding the Nobel Prize in Economics, I believe that each recipient should receive an equal share of the prize money. Honor is simply too great to be belittled by worrying about financial reward. My father (the late Dale Mortensen) was one of three to share the 2010 Savings Prize equally with Christopher Pissarides and Peter Diamond. I always thought it was a healthy approach so I was a little surprised to see the 50-25-25 split this year. Either way, congratulations to the most recent winners! Their lives will be turned upside down for the next few months at least. It was a hell of a trick, even for those on the sidelines applauding their parents’ accomplishment.
Township of Shelby, Michigan.
Quote of the day
“We will do all we can to increase the production and supply of coal.”
– Zhao Chenxin, secretary general of China’s National Development and Reform Commission, at a press briefing on Wednesday
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