“The ‘shortages’ we see in low-paying jobs and the wage pressures that go with them are a harbinger of success” for the president’s agenda, said Julia Coronado, founder of MacroPolicy Perspectives.
This success may be short-lived. Higher wages could be one of the main factors putting pressure on the Federal Reserve to raise interest rates if clear signs of a spike in inflation appear. They also risk slowing the hiring of those who will increasingly seek to return to the workforce as the pandemic abates, as companies try to cut costs. This is why workers’ compensation was at the center of the concerns of Fed officials in Friday’s US employment report for May. They want to see wage gains for the workforce – but what lies behind it begs questions.
Wage growth “is positive if it reduces hardship, reduces inequality and is not eaten away or reversed by higher inflation,” said Tim Duy, professor of economics at the University of Oregon and former US Treasury economist. “But we should be aware of the possibility that we are inducing more inflation.”
Income growth has been relatively strong, especially in the past two months, despite disappointing overall employment growth. Wages rose about 2% in May from the previous year, and that number probably underestimates the actual amount of income growth for technical reasons; low-wage workers lost their jobs disproportionately last year, making the overall average of those who kept their jobs seem higher back then, and the opposite effect is now happening as Americans are returning to the workforce.
“Anyone who looks at the 2.0% annual wage increase doesn’t understand the story,” said Jason Furman, a Harvard professor and former economic adviser to President Barack Obama, in a tweet. “Nominal wages rose 1.2% in April / May. That’s an annual rate of 7.4%. It’s huge.”
The pressure to do more to attract employees may continue to grow in some industries facing the public. According to the Ministry of Labor’s employment report, around 2.5 million people are still prevented from looking for work due to the pandemic. Wages for non-management leisure and hospitality workers rose 1.3% last month and 3.7% from May 2020.
At the heart of the struggle for higher wages is the desire of workers to share more of the nation’s economic benefits after decades of weak wage growth – the result of weakened unions, with companies relocating their overseas production and increased use of employment -move automation. This would ideally translate into larger increases as the economy grows faster.
But if higher wages are instead passed on to customers at higher prices, it can create an inflationary cycle, as opposed to the one-off price increases that many experts believe the economy can absorb as people behave. and global supply chains are returning to normal. .
“In the short term, I wouldn’t say it’s necessarily a dangerous situation if we’re just increasing the wages of a group of traditionally disadvantaged people,” Duy said. But the more shortages there are that make employers feel more comfortable raising prices as well as wages, “that’s where you come into this potential shift in the psychology where wage gains and earnings go. of prices become linked “.
Heidi Shierholz, policy director at the Left Institute for Economic Policy and former chief economist at the Department of Labor, said Americans do not see the kind of widespread wage increases induced by the shortage that would be of concern.
“Things are renormalizing; it’s not like things are bad, ”she said, adding that some of the wage increases for leisure and hospitality workers could come from a return to normal tipping practices when tipping. the reopening of restaurants.
“I have longer term concerns,” she added. “Salaries were too low in this industry before Covid hit, so renormalization is not exactly where we want to be. “
For its part, the Fed pursues a state of “full employment”, where wages rise because most people have jobs, and the central bank has said it is ready to tolerate inflation above its target of 2. % to achieve this.
But the reluctance of some workers to return to the workforce only creates the illusion of this dynamic, said Adam Ozimek, chief economist at Upwork.
“If employers are raising wages right now because of temporary shortages, it risks slowing job growth when those temporary shortages are gone,” Ozimek said.
“If we were at full employment, and we saw inflationary pressures, that wouldn’t concern me at all,” he added. “You get it for good, lasting reasons. It is not the same as inflation due to temporary supply shortages.
Worker advocates, on the other hand, argue that higher wages will ultimately help the economy heal faster – and more equitably.
“I don’t think wages are expected to rise to the point of restricting economic growth,” said Andrew Stettner, senior researcher at the Century Foundation, a progressive think tank. “On the contrary, raising wages is one of the best ways to get the economy out of stimulus.”
Even Ozimek said there was a lot of room for optimism, saying the possibility of hyperinflation is remote.
“Our political experiment is that instead of providing just enough support to come out of a recession, you are doing more than you think you need to,” Coronado said. “It creates high pressure recovery. “
“If all goes well, we’ll end up with an organic positive feedback loop between hiring and spending” that drives growth, she said.
Constance Hunter, chief economist at KPMG, said there could also be inflationary pressures from high-income workers who did not lose their jobs to the same extent as lower income brackets in the year. last. This means that part of the labor market is much closer to what it was before the pandemic, when the unemployment rate fell to 3.5%.
“If you look at the unemployment rate for people who can work from home, it’s 3 percent,” she said. “Because averages don’t tell the story, you have to take into account that there might be wage inflation among some of the higher paying jobs. “
For industries like retail or catering, “you probably see areas of the country where it’s really hard to hire,” she said, although in some cases companies are just finding extra ways. to automate rather than increase wages.
“Are we seeing the whites of inflation, or is it something else?” Hunter said. “It’s probably transient, but I’ll take a close look at the data. It’s not something you want to miss.