How Much Do Labor Costs Drive Inflation?
How Much Do Labor Costs Drive Inflation?
Tight labor markets have raised concerns about the role of labor costs in persistently high inflation readings. Policymakers are paying particular attention to nonhousing services inflation, which is considered most closely linked to wages. Analysis shows that higher labor costs are passed along to ...
Spoiler: Not very much at all
It would be interesting to see the analysis done further back. Going back to 1983 doesn't include the inflationary periods from the 70s and late 40s and early 50s. The 70s was claimed to be a labor cost driven inflationary period, but the early 50s were considered a supply shortage and profit growth inflationary period. 1983 is basically two years after the 70s inflation finally ended.
The author might get more of a "it depends" answer if they included the 70s.
Good point. The conclusions drawn from this data won't apply to all situations. Then again, the further you go back the less the economy of the time resembles that which we live in today... Regardless I think it's good to see some hard data rebutting the claims of (the recent spike in) inflation being caused by wage gains. The "Nobody wants to work anymore" sentiment.
Do you listen to Planet Money? They've got a recent episode that talks about wage vs profit driven inflation. It's kinda interesting to hear about how even economists aren't immune to just repeating the standard line without looking at the data. The tide is starting to turn on opinions about this last round of inflation, and the researcher they interview draws direct lines to the post-WW2 economy.
A 1pp increase in the ECI increases the contribution of NHS inflation to core PCE inflation by 0.15pp over four years—an effect of 0.04pp per year. As ECI growth has increased by about 3pp from its pre-pandemic level, this means that labor costs have added approximately 0.1pp to current core PCE inflation.
What are the implications here?
Prices (PCE) have gone up a lot. Wages (ECI) have gone up a little. So logically most of the extra money everyone pays for goods and services (inflation) is going somewhere other than wages...
Coincidentally, profit margins in certain industries have significantly expanded during this same period. It really does look like a lot of "inflation" was more like profiteering, many companies used the panic about inflation to push prices up regardless of actual costs.
It is crazy to think that a loss of our moneys value is to be expected and normal. If we used a hard currency such as silver then "inflation" would not be a problem as govetnmyths could not print more at will and devalue the peoples holdings. Governmyth is totally to blame for poverty through taxes and inflation
Your "hard currency" is inherently deflationary. This may seem good to you since it means your dollar is worth more tomorrow than it is today, but the same is true for everyone else's dollars too. The net result is to discourage spending across the entire economy and that leads to much worst outcomes. There is a good reason that central banks aim for a small amount of inflation rather than zero or negative inflation.
A good thing would be a net inflation of zero. A little deflation or a little inflation is not a problem. If your money 100 years from today is still worth the same you hace a good balance. Look at monero for example. It is inflationary as there will always be 0.3 monero per minute created. However some will get lost due to lost keys, etc. Also, as the supply increases that extra 0.3 monero becomes less and less of the total. So its asymtotically zero.