Jun 25, 2021 Americas

That 70s horror show

So far at least, U.S. wage increases have been very unevenly distributed. Are we moving from transitory inflation to transitory labor-market tightness?

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It sounds like the textbook version of an economic horror story:

sharply rising wages risk pushing up consumer-price inflation into regions last seen in the 1970s, in turn leading to even higher wage demands. To keep a lid on what is commonly known as a wage-price-spiral, the U.S. Federal Reserve (Fed) will – eventually – have little choice. Breaking up the vicious circle will require tighter money, thus triggering a recession. Or so doomsayers claim.

The true part of this story is that some wages are indeed rising and that those who declared inflation dead decades ago were always likely to be proven wrong – eventually. A closer look, however, reveals just how unevenly distributed U.S. wage increases have been. For instance, average hourly earnings in the leisure and hospitality sector increased by almost 13% on an annualized basis during the first five months of 2021. But as our Chart of the Week shows, that is very much an outlier, even compared to other relatively lowly paid jobs such as those in the retail trade.

20210625_CotW_US Labor market_CHART_EN_72DPI.png

* Significant wage increases in low-wage sector
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 5/31/21

"We expect this pressure to fade as more and more people get comfortable returning to work, whether or not they change careers."

Christian Scherrmann, U.S. Economist

Christian Scherrmann, U.S. economist at DWS, sees plenty other forces at work too. "Generous fiscal support during the pandemic; ongoing extended unemployment benefits; pandemic-related distortions to everyday life: all these probably play a role."[1] According to surveys many would-be workers remain fearful to return to work, while others are instead searching for new career opportunities, but unable to find them in the areas where they live.[2]

Still, would an upward adjustment in wages really be all that scary, after years of lackluster wage growth? "The current situation is enabling people to obtain higher wages," Scherrmann explains. "We expect this pressure to fade as more and more people get comfortable returning to work, whether or not they change careers." As for inflation, the current friction in labor markets will probably increase prices, as will disruptions to global supply chains and high prices for raw materials. That, though, seems rather unsurprising, given fiscal intervention on a scale never before seen in peacetime and supported by highly accommodative monetary policies. Before too long, both are likely to fade too, suggesting the 2020s will not just be a repeat of the 1970s.

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