As the United Auto Workers strike against General Motors, Ford Motor and Stellantis expands and the union continues to hold out for big wage increases, some analysts are worrying that higher pay will be inflationary. The nightmare scenario is that wages drive up prices, which cause workers to demand even more money, and so on, in a ruinous upward spiral. Geoff Yu, a senior market strategist at BNY Mellon, said on Bloomberg Television last month that the unions are “making the gamble or the determination” to ask for more money in a way that could trigger a wage-price spiral.
In reality, a wage-price spiral triggered by union demands is pretty unlikely. In fact, wage-price spirals of any origin are uncommon. And there are signs that workers are lowering their expectations for higher pay as inflation ebbs.
On Thursday, Goldman Sachs issued a report saying that wage hikes for unionized workers are a “lagging indicator — the final echo of last year’s inflation surge.” Its author, economist Ronnie Walker, wrote that unionized workers, whose contracts last three years on average, are just now getting a chance to catch up to the kinds of pay raises received in the past couple of years by people who don’t work under multiyear contracts.
“The two pressures that raised wage growth sharply this cycle, a very tight labor market and high inflation, have both diminished substantially,” Walker wrote.
At the moment, wages are rising faster than inflation, which means that “real,” or inflation-adjusted wages, are rising. But that comes after almost two years in which wages and salaries as measured by the Employment Cost Index rose more slowly than inflation. The current uptick in wage growth “can be given an optimistic interpretation, as a sign of real wages going back to trend, and not necessarily as a concern of an ongoing spiral,” the economists Guido Lorenzoni of the University of Chicago Booth School of Business and Iván Werning of the Massachusetts Institute of Technology wrote in a paper prepared for the fall session of Brookings Papers on Economic Activity last Friday.
“Where is this wage-price spiral?” David Rosenberg, president of Toronto-based Rosenberg Research & Associates, wrote to clients last week. People are not expecting big raises, he said. He pointed to the Conference Board’s consumer confidence survey, which found that in September the share of people expecting higher income in six months fell to a six-month low, while the share expecting lower income in six months rose to a nine-month high.
“There is almost no evidence” that wage increases lead to inflation, Rosenberg wrote. His firm conducted a statistical test (called Granger causality) that found inflation causes wage increases, but not the other way around. He predicted that rather than passing along higher wage costs to customers, companies would be forced to swallow them and accept lower profits.
One last fact: The Hiring Lab at Indeed.com, the big online job site, said that in August, posted wages for job listings for production and manufacturing workers were up 4.2 percent from a year earlier, down from 11 percent annual growth in December 2021. Indeed’s wage tracker is more sensitive to current economic conditions than Bureau of Labor Statistics wage data, because it captures only new listings, not what everyone is getting paid.
Employers are resisting raising pay, even though they’re still having a hard time filling jobs, because they don’t want to be stuck with a big wage bill as inflation recedes, Cory Stahle, an economist at Indeed, told me. “When you lock in an employee at a higher wage rate, it’s kind of hard to say, ‘Hey, inflation has come back down so we’re going to bring that wage back down,’” Stahle said.
Outlook: Ben Engen
The U.S. economy probably gained about 140,000 nonfarm payroll jobs in September, and the unemployment rate probably edged down to 3.7 percent, the economist Ben Engen of Action Economics in Boulder, Colo., wrote on their website last week. For comparison, in August the economy added 187,000 jobs and the unemployment rate was 3.8 percent. The economists are expecting the Bureau of Labor Statistics to report that aggregate weekly hours worked were flat in September after a 0.4 percent gain in August. The bureau’s report is slated for release on Friday.
Quote of the Day
“Why the brinksmanship? Why the theater? Why to the last minute?”
— Shalanda Young, director of the Office of Management and Budget, discussing passage of a stopgap spending bill, on “This Week with George Stephanopoulos” (Oct. 1, 2023)