Inflation is up and wages are up. Average hourly earnings for production and nonsupervisory workers rose 5.5 percent in the 12 months through September, which was the most since 1982, except for a few other months of the pandemic.
But don’t blame rising wages for inflation. I have two charts that demonstrate that workers are victims of inflation, not the perpetrators.
The classic inflation story is that when the labor market is tight, workers demand higher pay, which forces employers to raise their prices, which makes workers want even higher pay, and so on in a vicious circle.
Part of that 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 quitting their jobs — a measure of confidence in being able to find work — hit a record high in August.
But for whatever reason, workers overall are not managing to extract much more money from their employers.
The first chart shows the inflation-adjusted employment cost index for total compensation, which includes wages and salaries as well as benefits such as health insurance. It covers all workers, not just production and nonsupervisory workers. The index is not influenced by employment shifts between occupations and industries — meaning it doesn’t go down one month if suddenly a lot of low-wage workers are hired in the hospitality industry. Since employment costs have been rising more slowly than consumer prices, the index has actually fallen.
My second chart shows that workers’ output per hour has risen faster than their pay. That’s reflected in a decline in the unit labor cost, which is an index of the output of goods and services divided by the cost of labor required to produce that output.
It shouldn’t come as a surprise that labor productivity remains strong. The U.S. gross domestic product has bounced back to above its prepandemic peak, while the number of workers employed remains millions below the prepandemic level. That simply says that output per worker has grown. Which is great for employers. It means that they don’t need to raise prices to cover higher labor costs.
So we have worker pay not keeping up with inflation and worker pay not keeping up with workers’ own productivity increases. That makes a solid case that workers are more sinned against than sinning when it comes to inflation.
That may not remain the case, however. Workers won’t remain patient forever if inflation continues to erode their take-home pay. True, a lot of the items that drove up inflation over the past year, such as gasoline and used cars, won’t remain expensive forever. But wage inflation tends to persist because workers’ expectations become anchored at a higher level.
Economists disagree on how much worker incomes will eventually spill over into the general price level. “Wage growth reflects a re-leveling of low wages rather than the onset of a spiraling price-wage inflation loop,” economists at 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 wouldn’t necessarily take higher wages to put pressure on prices. All it would take is for more people to go back to work, increasing the total spending 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 percent from a year earlier. He said he expects that after the pandemic gyrations have ended, the annual rate of increase in the price index for personal consumption expenditures will settle down around 2.3 percent, which would be around half a percentage point above the average since 1995. Two factors in the step-up of inflation: higher shelter costs because of pent-up demand and short supply of housing, and higher labor costs because of tightness in the lower-wage end of the market. (The high-wage end of the labor market is always tight, he said.)
That seems plausible. A persistent inflation rate of 2.3 percent in the Federal Reserve’s preferred measure would annoy the Fed, which aims for 2 percent. But it would be much lower than the numbers that dominated the headlines this week. And if it’s partly because workers at the bottom of the wage pyramid are doing better — well, there are worse things.
The readers write
On the topic of the Nobel prize in economics, I think each recipient should get an equal share of the prize money. The honor is simply too great to cheapen by worrying about financial recompense. My father (the late Dale Mortensen) was one of the three to share equally in the 2010 economics prize along with Christopher Pissarides and Peter Diamond. I always thought this was a healthy approach so was a bit surprised to see the 50-25-25 split this year. Regardless, congrats to the most recent award winners! Their lives will be turned upside down for next several months at least. It was a heck of a ride even for those that were on the sideline applauding their parent’s accomplishment.
Shelby Township, Mich.
Quote of the day
“We will make every effort to increase coal production and supply.”
— Zhao Chenxin, secretary general of the National Development and Reform Commission of China, at a news briefing on Wednesday
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