“The ‘scarcity’ we see in low-wage jobs and the associated wage pressure are an early sign of success,” said Julia Coronado, founder of MacroPolicy Perspectives.
This success can only be short-lived. Higher wages could be one of the biggest factors putting pressure on the Federal Reserve to raise interest rates if there are clear signs of rising inflation. You also risk slowing attitudes for those who will increasingly try to return to work after the pandemic has subsided as companies try to keep costs down. Because of this, workers’ pay was the focus of Fed officials in Friday’s May May employment report. They want wage increases for the workforce – but what’s behind them raises questions.
Wage growth “is positive when it reduces hardship, diminishes inequality, and is not eaten up by higher inflation or vice versa,” said Tim Duy, an economics professor at the University of Oregon and a former US finance economist. “But we should be aware of the possibility that we are causing more inflation.”
Income growth has been relatively strong, particularly in recent months, despite disappointing overall employment growth. Wages rose about 2 percent year-over-year in May, and that number probably underestimates real income growth for technical reasons; Low-wage workers lost jobs disproportionately over the past year, making the overall average of those who retained their positions appear higher, and the opposite effect is now occurring when Americans return to the labor market.
“Anyone who looks at the 2.0% rise in wages is missing the story,” Jason Furman, Harvard professor and former top economic advisor to President Barack Obama, said in a tweet. “Nominal wages rise by 1.2% in April / May. That is 7.4% per year. That is enormous.”
The pressure to do more to attract employees could continue to increase in certain publicly accessible industries. According to the employment report by the Ministry of Labor, around 2.5 million people are still being prevented from looking for work because of the pandemic. Non-executive wages in the leisure and hospitality industries rose 1.3 percent last month, up 3.7 percent from May 2020.
At the heart of the struggle for higher wages is the desire that after decades of sluggish wage growth – the result of the weakening of unions, companies relocating production abroad, and increased use of jobs – workers share a larger portion of the country’s economic gains – Replacing automation. This would ideally show up as bigger increases as the economy expanded faster.
But if higher wages are instead passed on to customers at higher prices, it can create a cycle of inflation, in contrast to the one-off price hikes that many experts believe the economy can absorb when people’s behavior and global supply chains return to normal .
“In the short term, I wouldn’t say that if we were just to raise wages for a group of people who are traditionally disadvantaged, this is necessarily a dangerous situation,” said Duy. But the longer there are bottlenecks that make it easier for employers to raise both prices and wages, “this is where you get into this potential shift in psychology where wage increases and price increases are linked”.
Heidi Shierholz, policy director of the left-wing Economic Policy Institute and former chief economist at the Department of Labor, said Americans are not seeing the kind of widespread, scarcity-driven wage increases that are cause for concern.
“Things are returning to normal; It’s not that things are getting out of hand, ”she said, adding that some of the wage increases for recreational and hospitality workers may have been due to the return to normal tipping practices when restaurants reopen.
“I have longer-term concerns,” she added. “Before Covid, wages were too low in this sector, so renormalization is not exactly what we want.”
For its part, the Fed is aiming for a “full employment” state where wages go up because most of the people have jobs, and the central bank has said it is willing to tolerate inflation above its 2 percent target to get there to get.
But the reluctance of some workers to return to work only creates the illusion of that dynamic, said Adam Ozimek, chief economist at Upwork.
“If employers raise wages precisely because of temporary shortages, there is a risk that employment growth will slow down once those temporary shortages are removed,” said Ozimek.
“If we had full employment and saw inflationary pressures, I wouldn’t care at all,” he added. “You get it for good and lasting reasons. It’s not the same as inflation due to temporary supply shortages. “
Workers’ representatives argue, however, that higher wages will ultimately help the economy heal faster – and fairer.
“I don’t think wages will rise enough to slow economic growth,” said Andrew Stettner, senior fellow of the Century Foundation, a progressive think tank. “If anything, one of the best ways to free the economy from incentives is to raise wages.”
Even Ozimek said there was plenty of room for optimism, saying the possibility of hyperinflation was unlikely.
“The political experiment we are doing is that instead of providing just enough support to get you out of a recession, you are doing more than you think you might need,” Coronado said. “This creates a high pressure recovery.”
“If all goes well, we’ll have an organic positive feedback loop between attitudes and spending,” which will fuel growth, she said.
Constance Hunter, chief economist at KPMG, said there could also be inflationary pressures on higher-income workers who did not lose their jobs nearly as much as lower-income groups over the past year. This means that part of the labor market is much closer to what it was before the pandemic, when the unemployment rate had fallen to 3.5 percent.
“If you look at the unemployment rate for people who can work from home, it’s 3 percent,” she said. “Since the averages are not telling the truth, you have to keep in mind that some of the higher paying jobs could experience wage inflation.”
For sectors like retail or restaurants, “you are likely to see parts of the country that are really hard to hire,” she said, although in some cases companies are just finding additional ways to automate rather than increase pay.
“Is what we see the white of the eyes of inflation or is it something else?” said hunter. “It’s probably temporary, but I’ll look at the dates carefully. You don’t want to miss that. “