MNI: Fed Economists Play Down Wage-Price Spiral Worries​

Rapid U.S. wage growth is unlikely to trigger higher inflation despite worsening employee shortages and signs the labor market is tighter than low participation rates would suggest, current and former Fed economists told MNI.

Recent compensation gains are faster than in pre-pandemic years, but well-anchored inflation expectations, a weaker Phillips-curve relationship between labor market slack and inflation and relatively steady business profit margins give little reason to worry about a 1970s-style inflationary spiral, the economists said.

"There seems to be a sense that there's less pass-through from wages to prices now. The wage growth we're seeing now is pretty similar to pre-pandemic levels -- a little higher for low-skilled workers but not a crazy amount higher -- and we weren't seeing huge amounts of inflation prior to the pandemic," said former Fed Board economist Stephanie Aaronson, now at the Brookings Institution.

NEW HIRES

Pay gains have concentrated in low-wage jobs, entry level positions and new hires, said Atlanta Fed economist John Robertson. The bank's Wage Growth Tracker, which tracks pay for continuously-employed people, popped above 4% in September and October for the first time since 2008, driven in large part by job-switching.

"What you're not seeing is the same upward acceleration for people who stay with their current job," Robertson said. "That suggests wage pressure is on the marginal worker you hire as opposed to spread across the workforce."

Wage growth is being driven by record job openings and a shrunken workforce, with few signs that labor supply struggles are easing, but businesses can adapt to a smaller pool of workers by investing in technology or cutting back on services, Robertson said.

Higher wages have been big incentives for the youngest workers, with those aged 16 to 19 in particular benefiting since the summer, said Aaron Sojourner, a former member of the White House Council of Economic Advisors and now professor at the University of Minnesota's Carson School of Management. The number of younger people in the workforce has also grown, surpassing pre-pandemic levels over a year ago, but the influx of older workers, who don't see much wage growth, has been depressed.

STEADY MARGINS

An analysis of producer price inflation relative to average hourly earnings at a detailed industry level by Cleveland Fed economist Willem Van Zandweghe found little evidence firms are increasing prices at a rate higher than the increase in labor costs. This suggests no imminent spur to inflation from businesses seeking to preserve margins.

"A narrowing of price-to-wage margins across industries might suggest more price pressures in the pipeline," he said, "but this year, when wage growth accelerated, the median price-wage margin has been constant."

In the leisure and hospitality sector, where prices aren't necessarily growing as much as wages, demand for workers remains high, noted Nicolas Petrosky-Nadeau of the San Francisco Fed. "Wage growth is still not high enough to eat into their incentive to hire workers," he said.

EXPECTATIONS KEY

A wage-price spiral could form if higher inflation expectations feed into wage demands, the economists warned. That risk is remote for now, they said, though others have pointed to survey evidence that Americans are losing faith in the Fed's determination to cap price gains.

Price expectations have risen since the pandemic, with inflation seen at 4.9% in 12 months according to UMich survey data. The Fed is debating when to raise interest rates to prevent them from drifting above 2%.

"A reason for staying alert is this coincides with a period during which, coming out of the pandemic, people are pushing back more on the conditions of work, especially wages and to some extent benefits, and especially in the low-wage part of the economy," said Jeff Fuhrer, former executive vice president and senior policy adviser at the Boston Fed.

"In theory those should be one-time, much needed adjustments," he said. "But there's some risk that the episode will last long enough, the wages will be staggered across time in a way that makes them look different from a one-time change, a series of one-time changes, and it might be that that will start to feed more into expectations."