Not so long ago, experts obsessively checked the latest statistics on Covid-19 cases. Now they are doing the same with the inflation numbers. According to figures published on October 13, US consumer prices rose 5.4% in the year to September, beating economists’ forecasts. A survey by the New York Fed published the previous day showed a slight increase in consumer inflation expectations. In its semi-annual report on the world economy, the IMF warned that the inflation outlook was “very uncertain”. Rising energy costs will drive up consumer prices in the short term. Pay also rises as ardent demand meets labor shortage. Will it fuel further price hikes?
When Covid-19 first hit, most forecasters expected bosses to cut bonuses and annual raises or even the base salary, as they did after the 2007-09 global financial crisis. Although wage growth slowed slightly at the beginning of the pandemic, that reluctance has since been abandoned. Oxford Economics, a consulting firm, notes that wages in the rich world are rising well above the pre-pandemic average. The acceleration in earnings per worker in the OECD, a club of most rich countries, is equally impressive (see Figure 1).
The wage numbers have been misleading at times during the pandemic. For example, when lockdowns were imposed, poorly paid people in service jobs left the labor market, which led to an increase in the average wage as measured by statisticians. Even so, wage growth appears to have been stronger than the extent of the economic downturn alone would suggest. Goldman Sachs, a bank, has developed a “tracker” that corrects biases caused by pandemics. Underlying wage growth is around 2.5% in the G10 group of major economies, as fast as it was in 2018.
So it’s no wonder that pay has become a hot topic in the corporate world. On October 6, Bank of America raised its company-wide minimum wage by 5%. Amazon now boasts of paying $ 22.50 an hour for shipping and packaging in America, which makes left-wing activists’ demands for a federal minimum wage of $ 15 seem strange. An index compiled by Goldman suggests that the stock prices of American companies, hardest hit by rising labor costs, have fallen 4% since May, while the broader stock market is up 7%. Even bosses in Germany, who were used to accepting unions for a long time, are now facing payment claims.
Some workers benefit more than others. An analysis of UK wage data by industry by The Economist suggests that annual wage growth is twice as dispersed as it was before the pandemic. Wages in the hotel and restaurant sector, which is struggling to attract workers, rose by 8% over the year to July; The increases in production were more modest. In America, the wages of the least paid quartile of workers are rising 70% faster than the top performers (see Chart 2).
Underlying wages are rising roughly three times as fast in Anglo-Saxon countries as in continental Europe. That could be because places like America and Canada are more reliant on the consumer-facing industries, which have the worst labor shortages. And France and Italy, where annual wage growth is below 1%, likely aren’t facing the same immigration crisis as Britain, which has Brexit, or Australia and New Zealand, which closed their borders to keep Covid-19 out.
Just a few years ago, economists complained about weak wage growth. So it may seem outrageous not to pop the champagne now because the opposite is happening. But salaries can go up for a variety of reasons, some cheaper than others. For a given level of productivity, higher wages must show up in two ways: as higher inflation or as a higher “labor share” of GDP.
Take inflation first. More expensive employees can force bosses to raise the price of everything they sell. In the worst case, higher inflation could undo any rise in cash wages, leaving workers no better off than before (and perhaps encouraging them to seek further wage increases). American real wages are increasing every month but remain lower than a year ago.
Some companies are happy to pass higher labor costs on to consumers. On a recent phone call, an executive at Domino’s Pizza discussed how the company could offset wage increases (more expensive margheritas may be on the way). Most S&P 500 companies protect their margins “by passing price increases on to consumers,” Goldman says.
However, other firms can absorb higher wages by accepting lower profits. That would change the distribution of the economic pie, increasing the “labor share” or the share of GDP that workers are paid as wages. Our analysis suggests that the share of employed people in the G7 has risen by about one percentage point since the beginning of the pandemic – that’s about $ 400 billion in additional real household income per year.
What does this mean for the economy as a whole? A big topic of discussion among economists is whether or not the proportion of work was declining before Covid-19. Most likely, America’s stock has fallen so a rebound might be welcome. However, a steadily increasing workload would be worrying: it would reduce corporate profits and thus the investment that is critical to improving long-term economic growth.
There is another, happier option. When productivity increases, wage growth need not cause sustained inflation or drive up the labor share. Instead, the economic pie would grow, with more for everyone.
Some evidence suggests that workers do more with less. Companies are investing in new technologies in order to meet new requirements, especially from online trading. “Hybrid” work can be more efficient than when everyone is constantly in the office. Productivity statistics are even more murky than wage statistics; but since the third quarter of 2020, output per employed person has increased in 25 of the 29 rich countries for which figures are available.
So the rise in wages appears to reflect a number of underlying economic forces and need not have a full impact on inflation. But predicting prices is just as difficult as predicting Covid-19 case numbers. One thing is clear: if wages continue to rise, the consequences will be profound. ■