A wage-price spiral in the making?

The major central banks have made it clear that they are willing to watch for any transient inflation as there is little they can do to stop such inflation quickly and there is always a risk of prematurely stifling the economic recovery. Therefore, all eyes (of central banks) will be on labor markets and wages and on any sign of a wage-price spiral.

In the United States, employment fell by more than 22 million peak-to-trough, but began to recover rapidly from May 2020. Job growth has slowed since then with employment still lower 7.63 million to pre-pandemic levels. We strongly suspect that the recently disappointing employment figures are due to a lack of supply of skilled workers rather than a lack of demand. Survey data shows that more and more companies are reporting vacancies that they were unable to fill. The labor shortage was also acknowledged in the Federal Reserve’s latest Beige Book, where “a growing number of companies have offered signing bonuses and increased starting wages to attract and retain workers” .

Recently disappointing employment figures in the United States mainly due to a lack of skilled labor.

There are four main reasons for the lack of manpower. First, there are childcare issues around home schooling, forcing many parents to stay home rather than go to work. Second, some workers are also concerned about the return as the pandemic is not over. Third, some older workers who lost their jobs may have simply decided to retire early, in part because of a strong stock market rally that improved the financial outlook for retirement. Finally, there is the debate on the impact of extended and upgraded unemployment benefits. They may have weakened the financial incentive to go out to work, especially for low-paying positions, especially when you factor in the costs associated with travel and childcare.

To be sure, the turnout in the United States is still low and it is possible that the political spending initiatives proposed by the government will bring in more workers to fill the shortages. Currently, 1.3 million people are unable to work, but would like to do so. There are another 550,000 people who have been discouraged from looking for work, which could mean that they feel they do not have the right skills or that the wages are not attractive enough to look for work. . Finally, there are another 1.8 million people who are described as not in the labor force, but would like to work and are available to do so now. These may be students who previously worked in bars or restaurants on campus, but were unable to attend distance education. However, since this untapped source of labor accounts for around 2.5% of current total employment, it is unlikely to prevent wages from rising in the long run.

Tensions on labor supply may not subside for three or four months.

As a result, labor supply pressures may not ease for another three to four months, which will likely keep job growth relatively subdued in the near term. This will not mean that the demand will disappear, but simply that companies that want to grow and grow will have to pay more to attract staff.

Average hourly wages rose 0.5% month-on-month last month against the consensus of 0.2%, which may offer early evidence of rising employment costs. Note that the employment cost index for the first quarter of 2021 has already posted the largest increases in labor costs in 15 years, led by the private sector which posted wages and salaries up 3 % year-on-year with benefits up 2.5%.

Overall, the mismatch between supply and demand in the labor market, combined with a political and Federal Reserve goal, is to ensure that as many people as possible feel the benefits of growth – that will only happen through jobs and wage growth – us in a position where we can see living wage figures for once. Federal employees now have a minimum wage of $ 15 / hour and companies like Amazon have also agreed to this, although there is no legislation in place to force them to do so. While the labor supply is expected to become more abundant, for those who have been inactive for more than a year, skills will have deteriorated and competition for skilled workers will remain intense.

A price-wage spiral in the United States cannot be ruled out.

If wages are also rising now, that means costs will rise in tandem, and if companies think they can pass them on, it could also mean that inflation will stay higher for longer. Higher wages would also give consumers more purchasing power. Therefore, a wage-price spiral in the United States cannot be ruled out.

In the euro area, the situation on the labor market is slightly different given the crucial role that leave schemes have played. We estimate that about 6% of employment was still supported by leave plans in March. While the unemployment rate peaked slightly below 9% and fell back to 8% in April, it is only slightly above the low of 7.1% seen in March 2020, most of the shock in the market. of the work being absorbed by the regimes introduced last time. year and are still running. The labor market slowdown is much larger than the unemployment figures suggest.

As a result of the delayed economic recovery, the shortage of skilled workers may be less pressing now than in the United States. Hiring plans have improved recently, but remain below all-time highs in the manufacturing sector and well below all-time highs in the service sector. With the reopening of retail, hospitality and leisure services, the euro area may also experience a temporary shortage of skilled workers. However, unless new jobs appear elsewhere, a return of people from leave schemes to full-time employment appears to be the most plausible scenario. In addition, short-term shortages in the hospitality sector could be filled by young people who have been on the margins of the labor market for more than a year now. Therefore, it is very difficult to see a tension in the labor market like that seen in the United States this year.

The slowdown in the labor market and the return of the euro area economy to pre-crisis levels by mid-2022 militate against significant wage growth.

In the longer term, the slowdown in the labor market and the return of the euro area economy to its pre-crisis level in mid-2022 are strong arguments against any significant increase in wages. Remember that even before the crisis, when unemployment rates in many eurozone countries were at record highs, wage growth in the eurozone was only around 2.5%. However, a slight increase in wage growth should not be ruled out given the close link between inflation and collective labor agreements. Here, direct indexation to inflation, as in Belgium, or more indirect or partial indexations, as in France or Spain, play a role. In Germany, unions often integrate real inflationary developments into negotiations. With this in mind, we could see wage growth in the eurozone to be north of 2%.