Are wages going up faster than inflation? WTF?
When inflation is going up faster than wages, folks make less. Also, inflation pushes people into higher tax brackets .
For the previous decade the Federales has artificially kept interest rates low. That's reduced the budget deficit and bolstered the stock market's meteoric rise. The Gov's ability to continue goes away in an inflationary environs.
Inflation Drives Wages Down, Not Up
The ‘wage-price spiral’ is a myth. It’s much easier to raise prices than wages.
By Judge Glock
Jan. 31, 2022 6:01 pm ET
Federal Reserve Chairman Jerome Powell speaks at a House Committee on Financial Services hearing in Washington, Dec. 1, 2021.
PHOTO: AMANDA ANDRADE-RHOADES/ASSOCIATED PRESS
The Labor Department released a report Friday showing that worker pay increased about 4% in one year, the fastest rate in two decades. This led to predictable alarm that the U.S. is facing a “wage-price spiral,” in which higher wages push up prices, which lead to demands for still-higher wages, and so forth. But the wage-price spiral is a false and antiquated economic idea that refuses to die and keeps generating bad policies.
Wages don’t spiral up during inflation; they spiral down as higher prices eat away paychecks. The dollar amounts on paychecks will rise, but not fast enough for their real value to outpace inflation. The recent stories of wage increases came not long after the government announced prices increased 7% in the past year. A more accurate headline for coverage of Labor’s report last Friday would have been “Real Wages Drop 3%.”
The reason real wages are dropping is simple. Wages are what economists call “sticky,” meaning they don’t change as fast as other prices do. When inflation comes along, gasoline stations can switch their price signs in an hour and restaurants can adjust their menus in a day, but most employees get a salary bump only once a year. Some unions renegotiate their salaries only every five years.
The combination of flexible prices and sticky wages also explains why inflation provides a temporary boost for business. John Maynard Keynes observed that inflation tends to increase profits because it creates a greater spread between the prices businesses charged and the wages they paid. As one International Monetary Fund report stated, during an inflation there is a “redistribution of income away from labor” to capital. This explains recent surging business profits.
We also saw this story play out in the 1970s, when the idea of the wage-price spiral first attracted attention. At the time, many Keynesian economists wanted to blame inflation on anything but the Federal Reserve printing too much money. So they came up with the wage-price spiral, also known as cost-push inflation, which they thought was driving up prices. But they confused nominal and real wages. Even though paychecks were for more dollars, their actual value dropped by almost 20% over the decade, as real profits increased.
As Fed chairman from 1970 to 1978, Arthur Burns didn’t want to take responsibility for inflation either. He blamed greedy workers and businesses and thus convinced President Richard Nixon to impose wage and price controls in 1971. This led to shortages throughout the economy and did nothing to stanch inflation. It was only after the Fed embraced the ideas of Burns’s former student Milton Friedman and began controlling the money supply that inflation went down.
This false idea of wage-price spirals can have devastating effects in downturns too. When prices were dropping and the economy failing in the Great Depression, some economists argued that low wages were holding back consumption. They demanded that the government mandate wage increases to help push up purchasing and prices—thinking this would push up wages even further. Although not named as such, they wanted to start a wage-price spiral upward.
At that time too, economists were confusing dollar wages with real wages. Economic research has shown that since prices fell in the first three years of the Great Depression, sticky wages meant the real pay of workers went up almost 11%. These high wages pinched business profits, prevented hiring, and drove unemployment to almost 25%. Even after the economy started to improve, however, President Franklin D. Roosevelt took the advice of those economists concerned about low wages and signed legislation to increase them through forced unionization and cartels in June 1933. This spurred more unemployment and hindered the recovery.
Both then and today, activists refuse to recognize the trade-offs between temporarily boosting the economy and driving up real wages. For instance, the “Fed Up” Campaign lobbies for more money printing and claims to be “fighting for full employment, rising wages, and a Federal Reserve that works for working people.” Yet the way the Fed creates a (temporary) boom is by allowing workers’ wages to drop and for businesses to hire more people on the cheap. Conversely, if the Fed wanted to increase real wages, they would create a deflation and then sticky wages would drive up unemployment.
The only way to have a prosperous economy for workers is to keep monetary policy stable, which means keeping the amount of money the government prints in line with the economy’s needs. Only the Fed can do that. If we start to blame inflation on other issues, like greedy workers or monopolizing businesses, we’re going to chase every solution except the real one. When workers’ cash their depreciated paycheck next Friday, it won’t be their fault that they’re falling behind. It’ll be the Fed’s.
Mr. Glock is director of policy and research at the Cicero Institute and author of “The Dead Pledge: The Origins of the Mortgage Market and Federal Bailouts, 1913-1939.”