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It all depends on where you point your microscope. This is the fundamental flaw of rationality - you can prove a very specific case, but when you try to make it

by csours 3y ago

It all depends on where you point your microscope. This is the fundamental flaw of rationality - you can prove a very specific case, but when you try to make it apply generally, you run into problems. So in this very specific case, the inflation that we've experienced over the past few years was NOT due to wage increases. You look in the microscope and see this to be true. Wages increases were not a primary cause of inflation (in this time period) The problem is when you generalize and say 'Wage increases do not cause inflation'. The problem is that you have exited your historical context and you are moving into a new context. Wage increases certainly CAN contribute to inflation; they were not your most recent problem, but they might be your NEXT problem. The other difficulty is that the human brain wants to be satisfied, it does not want to understand all possible context. So the brain loves it when you can just say "Here is the problem, the whole problem fits in this box, and here is the one single, simple cause of the problem." (Apologies for overusing the word 'problem')

burkaman 3y ago
That's reasonable, and this post is making that specific argument "that wages have not caused or continued the inflationary surge observed in 2021 to 2023." So I think you and the author agree here. I'm guessing the author would also agree that a blanket "wage growth doesn't cause inflation" statement would be too broad and not supportable.
NominalNews 3y ago
Hi! Author here. This was actually my second article on wages and inflation (the first one can be found on my site - Dec 4, 2022 - Wages and Inflation). In that one I tackled the generalizability of the result, especially to the US economy. I 100% agree that for a result to hold, we need similar assumptions and conditions (basically the issue of external validity of a study). Regarding wage growth and inflation and the causality between the two, it actually has been studied quite heavily. From my previous post: "Due to the simplicity and logical appeal of this theory [wage-price spirals], it has been heavily tested empirically. Most empirical studies to date suggest, however, that wages do not cause1 inflation. Schwerzer and Hess (2000) from the Cleveland Federal Reserve did an overview of the economic research at the time and found very little evidence supporting the idea that wages cause inflation. Only one study showed a causal impact2, while three others, and Schwerzer’s and Hess’ own work were not able to find this causality. The reason for the ambiguity in results is because inflation and wages move so closely together that attempting to separate and isolate which one causes which is not straightforward to do. Their own work focused solely on establishing the direction of causality, using what is called in economics and statistics “Granger causality”, which is a test whether the future values of one time series3 (inflation in our case) can be predicted by past values of another time series (nominal wage growth) and vice-versa. The review and analysis conducted by Schwerzer and Hess suggests that increasing wages do not cause inflation. On the contrary, evidence likely points to inflation driving increased wages." So I would say so far the preponderance of evidence suggests there is unlikely to be causality of wage growth on inflation [in the US]. Multiple methods have shown the causal link is unlikely. Are there circumstances in which wage growth can be the trigger of runaway inflation - I suppose there will be such conditions (how feasible/realistic they are is also a question). Have they occurred it in the US - does not appear so. However, regarding the main issue at hand (i.e. current inflationary surge), there is even more evidence that it has not been the case, and we are nowhere near wage growth that would make us wonder about the wage-price spiral. Real wages are growing well below productivity. Summarizing - you are 100% right that it is important to keep an eye out on external validity issues. It is also important to state the underlying assumptions (whether it is regarding the conditions of the economy or the mechanisms). It is something I am trying to get across with all of my writing and maybe could have done a better job in this particular case (although I have written a more theoretical post on the same topic, so that influenced the writing here)

by csours 3y ago

burkaman 3y ago

That's reasonable, and this post is making that specific argument "that wages have not caused or continued the inflationary surge observed in 2021 to 2023." So I think you and the author agree here. I'm guessing the author would also agree that a blanket "wage growth doesn't cause inflation" statement would be too broad and not supportable.

NominalNews 3y ago

Hi! Author here. This was actually my second article on wages and inflation (the first one can be found on my site - Dec 4, 2022 - Wages and Inflation). In that one I tackled the generalizability of the result, especially to the US economy. I 100% agree that for a result to hold, we need similar assumptions and conditions (basically the issue of external validity of a study). Regarding wage growth and inflation and the causality between the two, it actually has been studied quite heavily. From my previous post: "Due to the simplicity and logical appeal of this theory [wage-price spirals], it has been heavily tested empirically. Most empirical studies to date suggest, however, that wages do not cause1 inflation. Schwerzer and Hess (2000) from the Cleveland Federal Reserve did an overview of the economic research at the time and found very little evidence supporting the idea that wages cause inflation. Only one study showed a causal impact2, while three others, and Schwerzer’s and Hess’ own work were not able to find this causality. The reason for the ambiguity in results is because inflation and wages move so closely together that attempting to separate and isolate which one causes which is not straightforward to do. Their own work focused solely on establishing the direction of causality, using what is called in economics and statistics “Granger causality”, which is a test whether the future values of one time series3 (inflation in our case) can be predicted by past values of another time series (nominal wage growth) and vice-versa. The review and analysis conducted by Schwerzer and Hess suggests that increasing wages do not cause inflation. On the contrary, evidence likely points to inflation driving increased wages." So I would say so far the preponderance of evidence suggests there is unlikely to be causality of wage growth on inflation [in the US]. Multiple methods have shown the causal link is unlikely. Are there circumstances in which wage growth can be the trigger of runaway inflation - I suppose there will be such conditions (how feasible/realistic they are is also a question). Have they occurred it in the US - does not appear so. However, regarding the main issue at hand (i.e. current inflationary surge), there is even more evidence that it has not been the case, and we are nowhere near wage growth that would make us wonder about the wage-price spiral. Real wages are growing well below productivity. Summarizing - you are 100% right that it is important to keep an eye out on external validity issues. It is also important to state the underlying assumptions (whether it is regarding the conditions of the economy or the mechanisms). It is something I am trying to get across with all of my writing and maybe could have done a better job in this particular case (although I have written a more theoretical post on the same topic, so that influenced the writing here)