We’re still waiting for that spiral in wage prices that central bankers fear will take inflation away
For historian Shirley Tillotson, today’s central bankers may be preparing to fight a ghost, spooked by fears of a wage price spiral etched in their collective economic memory of a bygone era. .
“We cannot allow a spiral in wage prices to occur and we cannot allow inflation expectations to become unanchored,” Jerome Powell, the head of the US Federal Reserve, said at his conference in November. press on monetary policy in May.
But according to many inflation thinkers – including Tillotson, a professor emeritus at Dalhousie University in Halifax who has researched Canada’s economic history – evidence that the wage demands of the 1960s and 1970s are driving up current prices at almost 8% is simply absent.
The Spiral Threat
Even as the Federal Reserve, Bank of Canada and other central banks around the world promise a series of substantial interest rate hikes to slow the economy and prevent another wage-led price spike, Powell said publicly that so far, at least, the threat remains elusive.
“We’re really not in the same kind of spiraling wage price environment that was asserted as early as the mid-1950s when diesel locomotive engineers went on strike,” Tillotson said, quoting a early example of a case where wage demands were accused of forcing prices up. .
“You know, [when] the idea that an extremely powerful labor movement was capable of holding the public hostage.”
But she said it was the 1960s and 1970s, a time when powerful industrial and public sector unions staged disruptive walkouts to demand higher wages as prices rose, that became entrenched in Canadian popular memory. .
During any period of high inflation, it is reasonable for some wages to increase as employees try to prevent their purchasing power from diminishing as prices go up. They may try to bargain collectively as part of a union or individually by threatening to leave for a better paid job.
A chain reaction
According to Craig Alexander, chief economist at Deloitte Canada, an arm of the global accounting and services giant, the reason economists fear spiraling wage prices is because of the cumulative effect – because companies pass the rising cost of wages on their customers in prices.
Something like a nuclear chain reaction, the spiral occurs when these higher prices stimulate more wage demands which lead to even higher prices in an endless cycle.
“If companies respond to higher wage demands by simply paying their workers more and then raising their prices to consumers, well, it’s going to be very difficult for us to get out of this inflationary environment,” Alexander said. “And central banks will feel the need to raise interest rates even further.”
He said Deloitte was trying to convince employers to consider other options.
Rather than being dependent on price increases, he said it was in the interest of companies to meet higher wage demands with greater efficiency and by spending new capital investments, which made them, as well as economy as a whole, more productive in times of labor shortages. But like others, Alexander has yet to see a large impact of wages on headline inflation.
“The inflation we are experiencing today is not primarily coming from wages,” he said.
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He said what may look like wage inflation in the statistics is actually the effect of workers moving into better paying jobs – something that is actually good for the economy, because rather than being inflationary, it demonstrates that workers are moving into hiring roles where companies value them more.
Although we haven’t seen it yet, Alexander said central banks fear that by trying to bring inflation down, a surge in wage demands will then cause a new wave of inflation. But while workers may be unhappy with rising prices and falling purchasing power, it’s not entirely clear whether they have the power to change that.
After Financial Times economics columnist Martin Wolf warned of parallels to the inflationary spurt of the 1970s, Canadian researcher Jacqueline Best, a University of Ottawa professor who studies the era, called her not taking into account the current weakening of the working power “amazing.”
“It’s not just about wanting higher salaries,” Best said in a later phone interview. “It’s about being able to demand higher wages, having the power to pressure your employer to respond, and I think there’s no question…workers don’t have that level of power at the moment.”
Wishing for a better salary is not enough
In the current cycle of inflation, one of the shortcomings of the price-wage spiral concept is that before the start of the current wave of inflation, wages barely budged.
“If, in fact, higher labor costs are the reason companies are raising prices, then we should have evidence that labor costs have increased as a trigger for this process” , said Jim Stanford, a well-known specialist in Vancouver. labor economist and director of the Center for Future Work.
And whatever drives inflation, Columbia University Economist Adam Tooze Agrees: It’s Not Wages.
“And if wages didn’t cause the problem, and that’s really clear in this episode,” Stanford said, “there’s absolutely no guarantee that lower wages will solve the problem.”
He points to the statistic that inflation has risen from 2% to 8% while wage growth has not changed – and he notes that wages are still growing more slowly than they were before the pandemic hit. struck.
“So the old fable, or parable, from the 1970s that workers were too pushy, wages were rising too much, and that’s why we got locked into that cycle, absolutely doesn’t apply today.” , Stanford said.
According to almost everyone, the trigger for the current inflation was not wages. Instead, it was a combination of increased consumer demand for manufactured goods as supply lines collapsed, followed by shortages of raw materials after the invasion of the Ukraine by Russia.
But as others have pointed out, while shortages may have been the spark, rising commodity prices did not lead to the reduction in profits that economists might have expected in a supply shock. In place, after-tax profit margins widened over the period to save levels.
“This is not a case of wage price spiraling,” Stanford said. “To me, it’s more like earnings price inflation, where companies have very opportunistically taken advantage of a disruptive moment to soak consumers more than necessary.”
It remains to be seen whether the hikes in key central bank rates will have a lasting effect on earnings. But as wage earners’ incomes continue to fall behind inflation, whatever the cause, the question remains whether workers will eventually find a way to regain their purchasing power or whether they will continue to pay the price as real wages decline.