MNI INTERVIEW: Increased Resistance To Wage Growth-Biz Chamber

U.S. businesses are increasingly pushing back against higher employee wages, and expect labor market slack to help them in negotiations next year even as job growth remains robust, Chamber of Commerce Chief Economist Curtis Dubay told MNI.

"The pressure that workers will put on employers to raise wages will meet with increased resistance," Dubay said in an interview. "There is some indication that businesses in general are not able to pass on price increases, as they have been the last couple of years."

While businesses are desperate for workers, "we have hit the limit on wages because they are having a hard time passing on price increases," he said. "Wage increases are sticky, too."

The pay negotiation season is looking increasingly fraught as workers fret about inflation and job security and businesses are increasingly concerned about the outlook. The labor market remains tight, evidenced by November’s better-than-expected jobs growth and various measures showing wages rising between 5% to 7%.

"I don't think we are able to take a deep breath yet and say that there won't be a wage price spiral," said the chief economist of the world’s largest business organization. But "if the labor market loosens it'll take away the ability of workers to demand higher wages next year."

The outlook for wage pressures has moved to the center of disagreements about the path for inflation and Federal Reserve policy over the next couple years. Fed Chair Jay Powell has said wage growth has been running around 1.5 to 2 percentage points too high than what would be consistent with 2% inflation when making various adjustments including for productivity from nominal wages.

MEETING DEMAND

Some Federal Reserve officials have expressed worry about reaching their 2% inflation target without a weaker labor market as wage pressures are expected to be longer-lasting. Dubay foresees a "long plateau" of inflation above 6% in the first half of 2023 before slowly falling to 2% by mid-2024, suggesting workers will not recoup pricing power anytime soon.

Businesses "are bracing for a slowdown, but when it comes to their personal situation they still need workers. They are still looking to keep workers on and looking to add. I continue to hear that there is a massive shortage of available workers," he said.

"They're really worried about the outlook but they tell me they're looking at their own prospects and saying they remain okay and so they're going to push ahead."

Small businesses and chambers of commerce across the country are "concerned about sales starting to slow down, but it's not the overarching concern yet because they are having a hard time meeting demand they have already," he said. "When I talked to business owners, the key problem still remains: They can't get workers and they can't necessarily get the supplies they need."

While Dubay expects the Fed to raise rates to about 5% next year, he also pushed back against any notion the Fed would be in a position to cut interest rates in the second half of next year given that Chair Jay Powell's legacy will be on the line. (See: MNI: FOMC To Signal Path To 5% Next Year - Ex-Fed Officials)

"What incentive would Powell have to start cutting in any situation that could remotely be construed as premature? The incentives are to make sure inflation's dead and gone before changing policy, before even talking about changing policy," he said.