With US inflation soaring inmany companies blame the rise in prices for having had to raise the wages of their workers, including , and .
Consumers get the message. As a Fort Worth Star-Telegram reader wrote to the editor, “You wanted higher wages, American-made products? So you better accept inflation,” she noted. “You asked for an increase in the minimum wage. Which resulted in an overall increase in wages. This increase was passed on to consumers.”
But while companies may point to rising wages, economic data shows that wages are far from the main driver of inflation. The fastest rising prices today – cars, fuel, housing and furniture – are moving away from wages and toward other explanations, such as shortages of goods or companies inflating their profit margins. More generally, it has long been clear that the relationship between what workers earn and what consumers pay is tenuous at best.
Highest inflation in low labor intensive sectors
If higher worker compensation were truly the main driver of prices, it follows that the more labor-intensive service sectors of the economy would experience the greatest increase in consumer prices. Yet the inflation chart today shows exactly the opposite: price increases in goods are outpacing services by a factor of three.
“Goods prices are the main driver of inflation,” Julia Pollak, labor economist at ZipRecruiter, told CBS MoneyWatch. “So far, wages have not been the main driver of inflation at all. Inflation was initially higher in low labor intensive industries.”
The most labor intensive items tracked by the— restaurants and personal services, a category that includes hair salons and beauty salons — rose 6.2% and 4.7%, respectively, from a year ago.
“Both of these numbers are still below the average inflation rate of 7.5%, and there are other categories that are seeing much higher price increases – gas prices, housing, furniture,” said Daniel MacDonald, professor of economics at California State University in San Bernardino. . “The reason these prices are going up is not because wages are going up for oil production in the United States. It’s about the oil markets, the real estate markets.”
Why gasoline prices have skyrocketed
Energy prices have skyrocketed since last year,fuel oil and all suddenly. That adds about 2 percentage points to headline inflation, said Ryan Sweet, senior director of economic research at Moody’s Analytics.
“Higher energy prices are directly observable in the CPI for utilities, electricity, gasoline, fuel oil, but it also affects other prices you and I pay. Businesses have to transport their goods and they will try to pass the higher transport costs on to you and me,” he said.
The economy of the 1960s in a world of the 2020s
The belief that worker wages and consumer prices are inextricably linked and that their increase immediately leads to a dreaded “wage-price spiral” of ever-increasing costs is a legacy of the mid-twentieth century, when the U.S. economy was very different. Major industries were regulated, a third of the workforce was unionized, globalization had yet to take hold, and companies were not allowed to buy back their own shares.
In such an economy, workers have been able to negotiate higher wages and labor costs have risen along with the costs of other inputs, said Josh Bivens, research director at the Institute of Policy. left-wing economy.
Since the late 1980s, however, the link between labor costs and other costs has been broken.
“It’s not that workers wouldn’t like to be able to secure higher wages in response to rising price pressures, but rather a number of developments – most driven by intentional policy decisions – have undermined the bargaining power of workers in the labor market for decades,” Bivens wrote last month.
“The relationship between wages and inflation is almost impossible to find,” added Jonathan Millar, analyst at Barclays. “The link tends to be much weaker than a layman might think. It turns out that even during this pandemic it’s not true that prices have actually kept pace with wages.”
Normally, the absence of a wage-inflation relationship has benefited consumers. Widespread wage increases, such as increases in the minimum wage, have not translated into higher prices. MacDonald of California State University, who co-authored a 2016 study on minimum wage increases, found that a 10% wage increase would result in only a 0.4% increase in consumer prices.
“We’re talking about the cost of a $5 cheeseburger going down to $5.04 — that’s very, very low,” he said.
The problem is that cheeseburgers, like gasoline, happen to be a category where minor price increases matter to shoppers.
“Certain goods and services are very visible to consumers, and they notice when those prices go up. The price of things at McDonalds or Chipotle – people tend to internalize that pretty quickly,” Barclays’ Millar said.
So what really drives prices up?
If wages aren’t the main reason for soaring prices, why are consumers paying more for everything from food to rent? One key factor that companies tend not to publicize: increased corporate profits.
Over the past year, despite the extreme economic upheaval of the pandemic, after-tax corporate profits have reached record highs as a percentage of economic output, according to the US Department of Commerce.
“Higher prices mean someone gets more income. Over the past year, it has been employers in sectors where supply has been reduced – shipping companies, oil producers and food wholesalers, for example – who get the extra revenue from higher prices,” Bivens wrote.
Some business leaders have been outspoken about their intention to pass on higher prices from the corporate supply chain to consumers. For example, consumer goods giants Colgate-Palmolive, Procter & Gamble and Unilever were able to raise prices without losing sales. Almost two-thirds of publicly traded companies are reporting higher profit margins than before the pandemic, according to the Wall Street Journal.
“Many companies we spoke to saw their overall payroll barely move,” Pollak of ZipRecruiter said. Due to the pandemic retirements, “they have lost their most experienced and highest paid people and replaced them with a younger cohort.”
And even when companies raise wages dramatically, they can still win if they get more work value from that person. “The increase in productivity that we are seeing with more home working means that [labor] unit costs can remain fairly stable,” Pollak said.
So, for now at least, a higher salary is not likely to reduce these higher benefits.