3 ms·

If the labor shortage generates inflation that outpaces wage growth it's a problem.

sokoloff 5y ago
It seems to me like long-run inflation is substantially tied to wage growth (or at least to income growth). Inflation can’t outpace income forever, or who will buy the goods?
- snovv_crash 5y ago
  Who will produce them if employee costs go up though? Both sides of the supply/demand curve are affected.
  - sokoloff 5y ago
    Exactly. I think of forces of this type as analogous to negative feedback in amplifiers. When a system gets out of whack, a system with negative feedback tends to stabilize. Too much inflation? People buy less. Too little inflation? People buy more. Labor too expensive? Less labor is used (perhaps via automation). Labor too cheap? More labor is soaked up on projects that would have been marginal or automated otherwise.
rsj_hn 5y ago
There's no "if" about it. Latest median earnings are negative for the last month as well as year over year: https://www.bls.gov/news.release/realer.nr0.htm https://www.bls.gov/news.release/realer.nr0.htm Real average hourly earnings decreased 1.2 percent, seasonally adjusted, from October 2020 to October 2021. The change in real average hourly earnings combined with a decrease of 0.3 percent in the average workweek resulted in a 1.6-percent decrease in real average weekly earnings over this period. Look at this graph: https://fred.stlouisfed.org/series/LES1252881600Q https://fred.stlouisfed.org/series/LES1252881600Q
- Jeff_Brown 5y ago
  It's indisputable that the two are happening -- the labor pool has shrunk, and real wages have shrunk too. And it is consistent with economic logic that greater business expenses will lead to inflation. But economic models also predict that scarce labor should lead labor to command higher wages. How those two effects net out is an empirical question -- no model can yet answer it definitively. (The models and the data are, however, both clear that freer immigration leads to greater total world output.) Also inflation is driven by labor squeezes outside of the United States. (Freer immigration into the US would actually worsen that problem, but negligibly, since US immigration is on the order of 100K people annually out of a world total around 8B.)
  - rsj_hn 5y ago
    It's hard to tease out covid supply shocks, massive expansionary fiscal policy, and immigration. My bet is that that this is the order of importance, but I could be wrong. Honestly, I don't understand why we are debating another few trillion of stimulus right now. My preference would be to pay for new projects with matching taxes until inflation subsides. We don't need any more "job creating" projects at the moment.
    - Jeff_Brown 5y ago
      That all sounds right to me. Contemporaneously matching taxes would be a novelty. Good lord your comment history is enthralling.
      - rsj_hn 5y ago
        Thanks! Sometimes I spend too much time on this site :)

It seems to me like long-run inflation is substantially tied to wage growth (or at least to income growth). Inflation can’t outpace income forever, or who will buy the goods?

snovv_crash 5y ago
Who will produce them if employee costs go up though? Both sides of the supply/demand curve are affected.
- sokoloff 5y ago
  Exactly. I think of forces of this type as analogous to negative feedback in amplifiers. When a system gets out of whack, a system with negative feedback tends to stabilize. Too much inflation? People buy less. Too little inflation? People buy more. Labor too expensive? Less labor is used (perhaps via automation). Labor too cheap? More labor is soaked up on projects that would have been marginal or automated otherwise.

rsj_hn 5y ago

There's no "if" about it. Latest median earnings are negative for the last month as well as year over year: https://www.bls.gov/news.release/realer.nr0.htm https://www.bls.gov/news.release/realer.nr0.htm Real average hourly earnings decreased 1.2 percent, seasonally adjusted, from October 2020 to October 2021. The change in real average hourly earnings combined with a decrease of 0.3 percent in the average workweek resulted in a 1.6-percent decrease in real average weekly earnings over this period. Look at this graph: https://fred.stlouisfed.org/series/LES1252881600Q https://fred.stlouisfed.org/series/LES1252881600Q

Jeff_Brown 5y ago
It's indisputable that the two are happening -- the labor pool has shrunk, and real wages have shrunk too. And it is consistent with economic logic that greater business expenses will lead to inflation. But economic models also predict that scarce labor should lead labor to command higher wages. How those two effects net out is an empirical question -- no model can yet answer it definitively. (The models and the data are, however, both clear that freer immigration leads to greater total world output.) Also inflation is driven by labor squeezes outside of the United States. (Freer immigration into the US would actually worsen that problem, but negligibly, since US immigration is on the order of 100K people annually out of a world total around 8B.)
- rsj_hn 5y ago
  It's hard to tease out covid supply shocks, massive expansionary fiscal policy, and immigration. My bet is that that this is the order of importance, but I could be wrong. Honestly, I don't understand why we are debating another few trillion of stimulus right now. My preference would be to pay for new projects with matching taxes until inflation subsides. We don't need any more "job creating" projects at the moment.
  - Jeff_Brown 5y ago
    That all sounds right to me. Contemporaneously matching taxes would be a novelty. Good lord your comment history is enthralling.
    - rsj_hn 5y ago
      Thanks! Sometimes I spend too much time on this site :)