Do higher wages prolong inflation?

Walmart, one of the biggest employers in the US private sector, has announced an increase in its minimum hourly wage to $14. It serves as a new benchmark for ‌reimbursement rates for many states in the US.

Approximately 500,000 personnel in the public sector of the United Kingdom have participated in industrial action regarding pay. Concurrently, labor unions in Germany’s public sector have begun to launch strikes as well. In the countries of Poland and Hungary, salaries have significantly increased, with a rate of growth of around 10%.

Even in Japan, where many people haven’t had a raise in decades, large employers give pay raises based on seniority, which is an important fact.

Whether the world’s workers can keep up with their paychecks is the biggest question facing central banks worldwide this year as they scramble to stop rising prices in time.

Central banks are not yet facing the kind of wage-price hikes that emerged in the US in the 1970s. Then, workers won pay increases for the better part of a decade, which led to further price increases until the arrival of Paul Volcker at the US Federal Reserve brought about a monetary regime. Volcker stopped inflation, but it came at the cost of the Great Recession.

Worryingly, however, price increases can permanently change the expectations and attitudes of workers, employers, and consumers. This could result in wage-price resilience, wherein a booming labor market lets service sector workers request bigger salaries, and businesses can pass on those costs to households.

Taming inflation

Some argue that the labor shortage is causing a much-needed adjustment in the balance of power between capital and labor and that wages must rise to protect living standards. But that can only happen if companies absorb the shock with lower profits – which has almost certainly happened so far.

Rising interest rates remain the standard way to deal with these pressures – stifling economic growth until workers are too afraid to lose their jobs to withstand higher wages. Companies are too afraid of losing customers and raising prices even further.