TIT RICH world is used to wages and prices rising slowly. In the decade following the global financial crisis, inflation rarely exceeded central bank targets and wages seemed unable to grow much faster. The purchasing power of the average hourly wage in Britain, Italy and Japan was about the same at the start of the pandemic as it was in the mid-2000s. averaged 2.9% from 2015 to 2019 while average inflation remained below 2% seemed a rare triumph.
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The recovery from the pandemic has brought about a surprising change: Both prices and wages are rising. U.S. hourly wages rose 4.6% in the year through September, while consumer price inflation of 5.4% more than wiped out those gains. In Germany inflation has reached 4.1% and the main public sector union is demanding a 5% pay rise. Wages and prices even increased slightly in Japan.
The causes of the price hikes are clear: soaring demand for goods has encountered bottlenecks in supply chains, and energy prices have skyrocketed. The growth of wages is more mysterious. In most places, employment is lower than it was before the pandemic. Yet workers seem reluctant or unable to take on the many jobs available to them. The labor shortage may reflect how difficult it is to move between occupations and locations as economies go through an unusual adjustment. Fear of the virus and the lingering effects of state support to household income could keep workers inactive. The pandemic may even have led some people to put family and leisure before their careers.
A fuzzy understanding of what drives wages up makes life more difficult for central banks. Most have argued that high inflation is temporary. But excessive wage growth could be the next driver of price hikes, especially if workers demand higher wages in anticipation of a future rise in the cost of living – insurance that exacerbates what it seeks. compensate for.
To avoid sustained inflation, a combination of three things must happen. Firms could absorb higher wages into their margins rather than raise prices. Productivity growth could make higher increases in real wages sustainable. Or inactive workers could return to the labor market, dampening wage growth.
In the popular imagination, the workers’ share of the economic pie can grow at the expense of profits. But recent research suggests that the share of labor in the value created by firms has actually been fairly stable in most wealthy countries over the past decades. We estimate that it has already increased by one percentage point on average in large, wealthy countries during the pandemic. There may not be much room for further increases.
Higher productivity growth is a reasonable hope. Production per worker has increased in America since the start of the pandemic. The digitization brought on by the pandemic is expected to increase living standards, especially if it reduces the need to live near expensive cities to get good jobs. The problem is that it is difficult to base policy on trends in productivity because of the lags. They are difficult to measure in real time and it takes around 18 months for central bank decisions to fully impact the economy.
This means that policymakers should focus on the supply of labor. His recovery has been disappointing so far. There are surprisingly few signs that the end of emergency programs, such as extended unemployment insurance in the United States and the British leave scheme, have increased the number of people looking for work. Perhaps, however, as bank accounts dry up and the pandemic abates, some slowdown will reappear in 2022, leading to slower wage growth. Even more than usual, policymakers should keep their eyes on jobs. â
This article appeared in the Leaders section of the paper edition under the title “Checks and imbalance”