Wages and Salaries are Not the Cause for High Prices

Another take on wages and salaries outpacing inflation. Not so says Robert Shapiro.

Inflation Reality Check: Don’t Blame Wages and Salaries for High Prices, Washington Monthly, Robert J. Shapiro

Yes, economics can be complicated, and economic reporters work under tight deadlines. There is no excuse for the media meme blaming rising wages for much of today’s inflation. The Wall Street Journal summed up this erroneous view in a recent headline, “Rapid Wage Growth Keeps Pressure on Inflation.” The Journal’s self-serving take is refuted by the data and rejected by the International Monetary Fund. And with corporate profits growing much faster than wages and salaries, it’s morally noxious to imply that ordinary people are greedy and disrupting the post-pandemic economic recovery.

AB: Lets back up a bit and see what our resident expert NDd says . . .

Nominally, average wages for nonsupervisory workers increased 0.2%, while prices deflated by -0.1%, meaning that “real” average wages increased 0.3% for the month.

While this only returns them to April’s level, and -2.2% below their December 2020 interim peak, they are also 1.5% higher than their pre-pandemic levels, and more importantly 1.3% above their recent June 2022 lows. Essentially all of the volatility in 2022 can be laid at the feet of the huge increase, then huge decrease, in gas prices.

It appears both talking in a similar fashion. Back to Robert Sharpiro . . .

I always thought that it’s a good thing when people’s wages and salaries rise faster than inflation because it means most people are getting ahead. It’s also the norm. No one complained, certainly not the Journal, when average hourly wages and salaries grew 9 percent, and inflation rose 5.1 percent, during Donald Trump’s first three years in office. (I use the Fed’s preferred measure for inflation, changes in prices for personal consumption expenditures.) Then came the pandemic, and as unemployment soared and swooned while growth swooned and soared, people’s average hourly wages and salaries still increased by 5.5 percent while prices rose only 1.3 percent.

Yes, inflation jumped to 6 percent in 2021, thanks to supply chain disruptions, energy prices spiking more than 50 percent, and rapid real growth pushing up average hourly wages and salaries by 4.9 percent. Those wage and salary gains lagged the price increases because when inflation heats up suddenly, businesses can raise their prices faster than workers can negotiate raises. But those wage and salary gains that followed the inflation didn’t cause it. In fact, they were in line with the increases of 2020. 

In 2022, the trend continued as average wage and salary growth increased by 4.6 percent while inflation eased to 5 percent. Those eager to blame the 5 percent price jump on average workers sometimes cite the 1970s, when union contracts with automatic inflation escalators and expectations of higher prices by businesses and the public exacerbated the damage wrought by OPEC’s serial price hikes.

But the 2020s are not the 1970s. Inflation escalation contracts are long gone, and the financial markets and the public expect our current inflation to go down quickly. The New York Federal Reserve Bank, for example, reports that from September 2021 to last December, people’s expectations for inflation three years out fell from 4.2 percent to 3.0 percent, and the expectation for five years out is 2.4 percent. Far from fearing that wage gains are fueling inflation, the public and the markets reasonably expect that price increases are headed toward the Fed’s own 2 percent target for inflation.

It’s outsized corporate profits, not wage and salary gains, that have been and are outstripping inflation—and perhaps contributed to it. Inflation measures the increase in the prices that companies charge, and their profits represent what’s left over after paying their workers, suppliers, vendors, and taxes. During the pandemic, from the first quarter of 2020 to the third quarter of 2022, post-tax corporate profits jumped 49.1 percent. That’s nearly three times the 16.8 percent increase in all workers’ incomes from wages, salaries, and benefits.

So, the next time someone tells you that wages and salaries are driving inflation, ask them how much their stock portfolios and dividends have grown.