Everyone got inflation wrong, and it's costing workers money in wage negotiations

Everyone got inflation wrong, and it’s costing workers money in wage negotiations

  • Inflation eased in October, but remained well ahead of year-over-year wage increases for most workers.
  • Many Americans expected inflation to cool sooner and faster than it did.
  • This miscalculation is one of the factors that play against them during salary negotiations.

Americans continue to wait for inflation to return to normal levels. But that wait has taken longer than expected, and that could be one of the reasons wages have fallen well below inflation over the past year.

The consumer price index rose 7.7% in October from a year earlier, the Bureau of Labor Statistics announced Thursday morning. That’s a big slowdown from previous months, but it still marks faster price growth than Americans had seen for decades before the coronavirus pandemic.

While American workers are experiencing the strongest wage growth in many years, fueled by strong labor demand, inflation has continued to dominate wage gains for most workers. The average hourly wage, for example, increased by 4.7% in October, continuing to follow even the slowing rate of inflation.

“Wage growth hasn’t beaten inflation. So if anything, wage growth is actually pulling inflation down,” EPI economist Elise Gould previously told Insider.

Several factors have held back workers in their wage negotiations, including the decline of unions, stagnating minimum wages, globalization and perhaps even corporate greed. But another key factor could be that American workers and their employers have continued to underestimate how much prices will rise in the future – and therefore the level of increases that workers will have to follow.

As economics writer Noah Smith put it in a recent blog post: “If employers and employees think inflation is going to come down in a few months, maybe they’ll continue to be surprised when inflation does not decrease, with the result that wages continue to underestimate inflation.”

When prices started to skyrocket, there was speculation that wages weren’t keeping up because most Americans only negotiated pay raises once a year. But now that inflation has been at least 5% for 18 straight months, employers – many of whom have seen their profits rise – have had plenty of time to raise wages. But wages haven’t kept up, and part of that could be because some people are underestimating the size of the raise workers would need.

A New York Fed article from October found that as inflation rose in 2022, Americans’ expectations for future price growth were “falling unexpectedly.” The authors speculated that once “extraordinary circumstances” like the pandemic and the war in Ukraine normalized, many people believed there would also be a “sharp drop” in inflation.

Even as inflation begins to decline, this precipitous drop has yet to materialize.

For example, when inflation hit 5% in May 2021, respondents to an ongoing New York Fed survey of about 1,300 Americans expected inflation to be 4% a year. later. It was 8.6%. In October 2021, respondents expected inflation to be 5.7% a year later, compared to the 7.7% just reported.

One-year inflation expectations peaked at 6.8% in June and fell to 5.4% in September, the lowest level since September 2021.

Perhaps the most recent projections from the Americans will turn out to be correct. But if their past miscalculations caused them to demand a smaller pay rise than they otherwise could have, they will end up falling behind.

Workers finally had the power to demand higher wages

The ongoing labor shortage is one of the main reasons workers have seen their wages increase. Despite the Federal Reserve’s efforts to cool the economy, the unemployment rate remains near a 50-year low and there are still well over 10 million job openings. Employers who need labor are usually willing to pay more.

With such high demand for labor, some experts have wondered why Americans’ wages haven’t risen even more. For example, the Fed’s concerns about a “wage-price spiral”, in which inflation leads workers to demand higher wages, leading to more spending and even higher inflation, did not materialize. yet materialized. Wages remained below inflation.

One explanation could be, at least in part, widespread expectations that inflation will be transitory.

As long as the unemployment rate stays low, job openings stay high, and a severe recession is averted, Americans may still have the power to push for the paycheck they’ve been missing out on. But economic conditions could change in no time; workers will not be able to enjoy these conditions forever.

“One of the threats of letting the unemployment rate go up is that not only could you see millions of people losing their jobs, but workers – even those who have their jobs – lose some of that leverage to be able to raise their salaries, because they’re less scarce,” PPE’s Gould previously told Insider.

There is evidence that companies have also miscalculated when it comes to forecasting inflation.

Inadequate pay is one of the reasons workers have joined the Great Resignation en masse in recent years. Despite the Fed’s efforts to cool the labor market, 4.1 million workers called it quits in September, well above pre-pandemic levels. Companies that continue to face labor shortages, as evidenced by the millions of job postings, might have lost fewer employees if they had simply paid them more. As the economy slows, not all businesses will be able to sustain further wage increases, but if they can, it might be their best bet to get those workers back.

While wages that don’t keep up with inflation are bad for Americans’ bank accounts, it could ultimately help dampen inflation further in the coming year. And if that results in the Fed slowing its pace of rate hikes — and a severe recession averted — it may be a fair trade-off for some workers.

#inflation #wrong #costing #workers #money #wage #negotiations

Leave a Comment

Your email address will not be published. Required fields are marked *