Economic policymakers and business leaders are very concerned about wage inflation. Average workers, not so much. Indeed, growth in real monthly wages around the world – which reflects the purchasing power of wages once cost-of-living inflation is taken into account – actually fell to -0.9% in the first half of 2022. This is the first time since 2008 that real wage global wage growth has been negative, according to a new report from the International Labor Organization.
While inflation in areas such as food and fuel hits the poor the hardest in any country, the relative decline in real versus nominal wages has actually been greatest in the rich world. Among advanced G20 countries, real wage growth in the first half of 2022 fell to minus 2.2%, while growth in emerging G20 countries slowed but remained positive at 0.8%.
Among the rich countries, North America has been particularly hard hit; average real wage growth in the United States and Canada fell to minus 3.2% in the first half of 2022. It is no wonder that concerns about wage-price spirals among policymakers are so high contradicts the actual experience of most North American workers.
Although Federal Reserve Chairman Jerome Powell acknowledged in a speech last week at the Brookings Institution that cost-of-living inflation eats up a larger percentage of the average paycheck, he also noted that there were 1.7 job openings for every unemployed person in the United States. .
As pandemic-related supply chain issues have mostly eased and energy markets stabilize, “wage increases are likely going to be a very important part of the [inflation] story to come,” Powell said. “What you’re seeing is a real imbalance between supply and demand,” he continued, with wage inflation still too much above the Fed’s 2% inflation target for bankers to centers relax.
Why is it? Certainly, the Covid-19 pandemic has played a huge role; labor force participation plunged in 2021 and has yet to recover. Many people remain unemployed because they continue to battle illness or care for dependents. But a bigger part of the story is a rise in retirements, which accounts for more than half of the 3.5 million-person labor shortage in the United States. Older people who have lost their jobs during the pandemic are struggling to find work again, even in a tight market. Others are simply taking early retirement due to the wealth effect linked to the real estate and stock market gains of recent years.
Beyond that, Fed Vice Chairman Lael Brainard wondered whether trends ranging from deglobalization to demographic shifts to climate disruption may also have altered the elasticity of the labor market, creating more volatility and inflation.
Whatever the underlying causes of labor market tensions, the fact that wage increases simply do not keep pace with other types of inflation creates a huge challenge for policymakers and business leaders. company. In response to rising inflation, companies are raising prices for consumers, while imposing “shrinkflation”: reducing both the size of products and the quality of services in places such as hotels, restaurants and airports.
They are also investing in technology, some of which is causing job losses, at faster rates than usual to try to offset wage inflation. But in the most developed countries, like the United States, where consumer spending accounts for up to two-thirds of gross domestic product, if people don’t have more money on their paychecks, neither do businesses nor the economy can grow strongly.
In the past, productivity gains made by workers have justified wage increases. But, according to the ILO, this year shows the largest gap since 1999 between productivity growth and real wage growth in high-income countries. People work more and better. But they just don’t see as much monetary benefit from their efforts as they would have in the past.
Given the gap between productivity and wages, there is reason to think that companies, especially those that still enjoy above-average profit margins, have room to increase labor’s share of the pie. . I would like to see various strategies deployed on this; incentives for companies that invest in worker training or other forms of productive capital expenditure that support the workforce, for example. Americans could also look to Europe, where job retention programs and wage subsidies keep real wage levels higher than in the United States, even after adjusting for energy inflation.
Americans are also grappling with another kind of inflation created largely by decades of expansionary monetary policy – asset price booms. Housing service inflation is 7% and continues to rise. But even this figure belies the true impact of the cost of housing. Between much higher interest rates and high prices, the average mortgage payment was 77% higher in October than it would have been the year before, according to the Realtor.com website.
This brings us to an important truth. Inflation for goods and services has only increased in the past two years. But we’ve had a lot of inflation in other areas, including asset prices, over the past few decades. It is a bitter irony that while monetary policy fueled the bubble everywhere and central bankers now have to stifle inflation, they have no tools to fix what is really broken in labor markets.
rana.foroohar@ft.com
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