Memo to staff: We highly value your work for us. However, we are not going to give you raises this year that are big enough to catch you up with inflation. We’re just doing what the Federal Reserve wants us to do.
That’s not a real memo, of course, but it fits the facts. Most workers get a raise once a year, typically in March or April. This spring would be employers’ chance to give pay increases large enough to restore their workers’ purchasing power, which has been eroded by unexpectedly high inflation. But it appears they aren’t going to do that.
The Bureau of Labor Statistics is likely to report next week that consumer prices in the 12 months through December rose about 7.1 percent, according to Action Economics, a consulting firm in Boulder, Colo. Yet the average increase in the compensation budgets of medium-size and large U.S. employers for 2023 is 4.3 percent, according to a November survey by Mercer, a consulting firm that’s part of Marsh McLennan.
Employers rarely cut workers’ nominal pay — the dollar number that appears on their checks — because they realize it’s bad for morale. But as the Mercer survey goes to show, employers have fewer qualms about cutting workers’ real pay, which is the nominal number adjusted for inflation. Real pay is what matters, because it determines what you can and can’t afford to buy.
The decline in inflation-adjusted pay appears to be “the most severe faced by employed workers over the past 25 years,” Robert Rich and Joseph Tracy, economists at the Federal Reserve Bank of Dallas, wrote in October, in an article with a former Dallas Fed intern, Mason Krohn. That’s somewhat surprising given the low unemployment rate, which would seem to give workers the leverage they need to demand higher pay. But high inflation came on so quickly that workers fell behind, and they haven’t caught up. Plus, a smaller share of workers belong to unions that bargain on their behalf.
Oh, as for the part of the imaginary memo about the Fed? Jerome Powell, the Fed chair, made clear at a Dec. 14 news conference that the Fed doesn’t want wage increases to catch up with prices. “It’s not that we don’t want wage increases. We want strong wage increases. We just want them to be at a level that’s consistent with 2 percent inflation,” he told reporters.
Inflation hawks such as Powell appear to believe that if wages did go up a lot this year — say 7 percent — employers would pay for them with another round of big price increases, which would trigger another round of demands for higher wages and so on ad infinitum. That would be bad. It’s true, as Powell repeatedly says, that low and stable inflation is a prerequisite for steady economic growth that leaves workers better off in the long run.
Unfortunately, in the short run, in trying to prevent a wage-price spiral from starting, the Fed is slowing the economy in a way that is likely to lock in employers’ advantage over employees.
Corporations have used high inflation as an opportunity to push through highly profitable price increases, and now workers are being deprived of the opportunity to even things out. “Inflation is fundamentally the outcome of the distributional conflict, between firms, workers, and taxpayers,” Olivier Blanchard, a professor emeritus at Massachusetts Institute of Technology, wrote in a weekend tweet cited Tuesday by my Opinion colleague Paul Krugman.
On Twitter, Blanchard sounds a lot like Michal Kalecki, a Polish economist, who in 1943 wrote an influential article for Political Quarterly, “Political Aspects of Full Employment.” Kalecki was also channeled in an article published by the Federal Reserve Board in May by two Fed economists, David Ratner and Jae Sim — representing themselves, not the institution — who cited the “conflict theory” of inflation as follows: “The cause of inflation can be found in the class conflict between capitalists and workers.”
Economists tend to attribute the end of high inflation in the early 1980s to the increase in the federal funds rate to as high as 19 percent during Paul Volcker’s chairmanship of the Fed in 1980 and 1981, but President Reagan’s firing of more than 11,000 air traffic controllers in August 1981, which weakened organized labor, may have been a factor as well, Ratner and Sim wrote. (Since they happened around the same time, it’s hard to tell.)
According to conflict theory, wage-price spirals occur when capital and labor are evenly matched, like a pair of heavyweights in a 10-round boxing match. Spirals don’t develop when the capitalists get a first-round knockout, which appears to be the present case. What’s worse for workers is that the referee — i.e., the Federal Reserve — is making it harder for them by pushing up unemployment and thus reducing their bargaining power. “I honestly think that a guy like Jerome Powell is embarrassed by this, but he won’t tell you,” Mario Seccareccia, a professor of economics at the University of Ottawa, told me.
Is there a better way to heal the economy than jacking up interest rates until the economy cracks and workers lose their jobs? Seccareccia mentions “incomes policy,” an old idea that involves government-mediated coordination between business and labor to restrain both prices and wages. Blanchard, a former chief economist of the International Monetary Fund, mentioned the same notion in his weekend tweets, as did Krugman. A Fed-induced slowdown, Blanchard wrote, is “a highly inefficient way to deal with distributional conflicts.” He added, “One can/should dream of a negotiation between workers, firms, and the state, in which the outcome is achieved without triggering inflation and requiring a painful slowdown.”
Incomes policy can get messy if the government meddles too forcefully or clumsily in the workings of the labor market. But the status quo ain’t great, either — especially for those of us who are staring at a pay “raise” this year that isn’t a raise at all.
Elsewhere: The Uncertain ‘Cone of Uncertainty’
A lot of people don’t grasp the “cone of uncertainty” that meteorologists use to show the possible tracks of a hurricane, according to an October article in the Bulletin of the American Meteorological Society. That’s relevant to economics — not only because hurricanes cause economic damage, but because economists have their own difficulties conveying uncertainty about their forecasts. University of Miami and University of Michigan researchers surveyed Floridians and found that 58 percent believed the bulge at the far end of the cone “shows the storm at its largest size.” In fact,since the cone shows the possible tracks of the storm, a bigger bulge conveys more auncertainty about the storm’s path.
Quote of the Day
“There continues to be the assumption that the only way in which work can be visible or valuable is if you treat it as if it were a market commodity or a market service and you attribute a value to it. That approach is anathema to me.”
— Marilyn Waring, in an interview by Aurora Online of Athabasca University (1997)