Here’s what it looks like:
And, notes Bivens, these data mean that the traditional explanations for inflation that many economists are now offering should be taken with several grains of salt. “The historically high profit margins of the economic recovery after the pandemic rest very uncomfortable with explanations of recent inflation based solely on macroeconomic overheating,” he writes. “Evidence from the past 40 years strongly suggests that profit margins are set to shrink and that the share of business sector revenue going to labor compensation (or labor share of income) is expected to rise as unemployment declines and the economy warms. The fact that the exact opposite pattern has played out so far in the recovery should cast much doubt on inflation expectations rooted simply in claims of macroeconomic overheating.
At DC Report, Dean Baker draws a similar conclusion. “A popular line on our recent inflation spurt is that an overly tight labor market has led to rapid wage growth, forcing businesses to raise prices. Higher prices in turn lead workers to demand higher wages, which will give us a wage-price spiral and soon lead to double-digit inflation,” contrasting with today’s reality.
Baker points out: “While this is a story that plausibly fits the data from the 1970s, it is very difficult to fit the wage and price spiral to the current situation for a simple reason: the share of wages in the revenues have fallen sharply since the pandemic.” The wage share had recovered slightly since the Great Recession, until “we are witnessing a sharp turnaround in 2021, with the wage share falling from 76.1% to 73.7%, a drop of 2.4 percentage points. Baker points to supply-side disruptions from the pandemic, rather than corporate earnings, as the inflation culprit. And Bivens, too, notes, “Non-labour inputs – a decent indicator of supply chain grunts – are also pushing prices higher than usual in the current economic recovery.”
the new report from Brookings looks at 22 large companies, finding that “in the 22 companies, the average real wage gain, taking into account inflation, was between 2% and 5% until October 2021. Unless these companies raised wages substantially since then, rapidly rising inflation would have eroded most, if not all, of the 2-5% average wage gains. And at most, only seven of the 22 companies pay at least half their workers a living wage, enough to cover only their basic expenses.
In contrast, these same companies ensured that their shareholders did very well, spending five times more on dividends and stock buybacks than they did to better pay their workers. Aimed at the workers who kept the companies running, this money could have made a big difference: average if they had redirected that money to the employees. The overall effect of how these large corporations handled their finances during the pandemic was unsurprising: “Workers have borne the brunt of the corporate losses, while managers and shareholders generally avoided them.”
So when someone tries to tell you that it’s a simplistic, unsophisticated approach to asking whether inflation might be tied to corporate earnings…feel free to push back. That’s not the only story, and supply chain issues are a big factor. But with corporate profits contributing more to higher prices than they did from 1979 to 2019, and with companies returning large sums of money to shareholders and shielding executives from lost wages during the pandemic while giving workers minimal raises, anyone who denies that companies bear the responsibility for rising prices and their effects on workers should be taken seriously.
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