Sunday, December 5, 2021

Wages are rising, but can they keep up with inflation?

American workers receive higher wages as employers pay to attract and retain employees. But these same people these days spend more on furniture, food, and many other goods and services.

It’s not clear which side of the equation – higher wages or higher prices – will benefit, but the answer could make a huge difference to the Federal Reserve and the White House.

There are several ways to develop this moment. Wage growth could remain significant due to a tight labor market, and overall inflation could slow as the supply chain collapses and the surge in demand for goods subsides. This will benefit the workers.

But alarming results are also possible, with what economists call the “wage-price spiral” above all else on the list of concerns. Employees can start clamoring for higher wages because they need to keep up with rising cost of living, and companies can pass these labor costs onto their customers, creating a vicious circle. As a result, today’s fast inflation may last longer than politicians expect.

The stakes are high. What happens to wages will matter to families, businesses and central bankers – and the way forward is far from clear.

“This is a multi-trillion dollar question,” said Nick Bunker, director of research for Indeed.

At the moment, wages are growing rapidly – just not fast enough to keep up with prices. One way to measure dynamics is the Employment Cost Index, which is published quarterly by the Department of Labor. Between September, the wage index jumped 4.2%. But the inflation indicator, which tracks consumer prices, rose 5.4% over the same period.

Another indicator of wages – an index that tracks hourly wages – did rise faster than inflation in August and September after falling behind for most of the year.

The update on Friday showed that wages rose 0.4% in October, roughly in line with the recent monthly price hike. Over the past year, this figure has grown by 4.9%. But hourly wage data has been skewed by the pandemic because low-wage workers who left the labor market in early 2020 are now bouncing back, sharply increasing their average.

The Labor Department said Friday that the US economy added 531,000 jobs in October, bringing the unemployment rate down to 4.6% from 4.8% in September, a sign that employers are more optimistic about the weakening of the latest spike. coronavirus. Economists surveyed by Bloomberg expected 450,000 jobs.

October gain was an improvement from 312,000 items added in September – a figure that was revised upward on Friday along with the figure for August, giving a more optimistic picture of the past few months.

Employment growth has been widespread, with significant gains in restaurants and bars, as well as in factories and offices. In another sign that conditions are slowly bouncing back, the proportion of employed people who worked remotely at some point in the past month fell from 13.2% to 11.6%.

“It was a strong employment report that shows the resilience of the post-pandemic labor market recovery,” said Scott Anderson, chief economist at Bank of the West in San Francisco. “I think we will see quite strong economic growth in the fourth quarter.”

The job picture has improved in most demographic groups. Unemployment rates for women, Hispanics, Asians and those without higher education have declined. However, the unemployment rate for blacks remained at 7.9%, nearly double the unemployment rate for whites.

This racial divide is likely to test the Fed’s new focus on balancing its inflation-control mandate with the goal of “maximizing inclusive employment,” as officials call it.

“It’s a euphemism, but the Fed takes it very seriously,” said Diane Swank, chief economist at accounting firm Grant Thornton. If the current spike in price increases does not stop by early next year, and internal and external pressures to prioritize price stability prevail, then “patience may run out sooner than people think,” she said, “and before Jerome Powell , Chairman of the Federal Reserve System, my pleasure.

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As a result, the struggle between higher prices and higher wages has not yet decisively changed in favor of the workers.

For policymakers, it will be critical whether wage growth overshadows inflation and why. Central bankers celebrate wage increases when they are linked to productivity gains and strong labor markets, but will worry if wages and inflation push each other towards growth.

Powell said Wednesday that the Federal Reserve is “watching closely” the alarming wage increases, although he noted that the central bank does not see such a trend emerging.

Recruiters are reporting some early signs that inflation is affecting wage decisions. Bill Casco, president of Frontline Source Group, a Dallas-based recruiting and staffing firm, said with rising gas prices, employees are demanding either higher wages or work from home opportunities to offset the increased travel costs.

“This becomes the subject of discussion at the salary negotiations,” said Kasko.

But for the most part, today’s wage increases are tied to a different economic trend: heated demand for workers. The number of vacancies is high, but many potential employees are left out of the game in the labor market, either because they decided to retire early, or because problems with childcare, problems with viruses, or other considerations discouraged them from working.

The federal unemployment supplement expired in early September, and experts are watching to see if ending this aid – and depleting savings accumulated through other emergency programs – will increase the availability of workers. So far, these effects have been muted.

“For the past 25, maybe 30 years, the workforce has been backing off and losing its share of the economic pie,” said Mark Zandi, chief economist at Moody’s Analytics. “But now that dynamic is changing.”

Emily Longsworth Nixon, 27, from Dallas, is one of the Kasko employees. She tried to hire a woman to be an executive assistant at a technology company that would have given her a $ 30,000 raise, and saw the candidate quit due to a counter offer at no additional cost other than three days of work from home a week.

“After that I kept my tail between my legs for a couple of days; I never thought to ask this, ”she said, adding that employers need to know their candidates like never before, as workers use their power to get home allowances and other benefits. “Before COVID, it was an employer-driven marketplace.”

These in-demand workers may end up in a better position if their wages continue to rise, even as supply chains recover and the prices of used cars and sofas drop, allowing them to afford more.

Wage increases could also become more resilient for employers as virus fears disappear and employees return from the labor market.

And even if the rapid rise in wages continues, employers will not be forced to sharply raise prices. Instead, businesses could take a hit to their bottom line or invest in productivity-enhancing technologies.

If fewer waitresses can sell the same number of meals due to customers placing orders, for example, using QR codes, employers will have leeway to pay more without affecting their bottom line.

But a happy outcome is not guaranteed. If today’s high prices do lead to tomorrow’s wage negotiations and set off an upward spiral, the result could be a longer period of high inflation that would push the Fed to raise interest rates to drive down demand and lower prices, slowing the economy and perhaps even sending it returned to recession.

“We haven’t seen a wage and price spiral in decades, but we haven’t seen inflation like this in decades,” said Jason Fuhrman, an economist at Harvard University and a former economic adviser to the Obama administration, calling the possibility a wage-driven spiral. open question”.

There hasn’t been a similar scenario since the 1970s and 1980s. But there has never been such a situation as isolation from a pandemic and subsequent discovery.

Nation World News Desk
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