Sunday, December 26, 2021

Surging Inflation Has Workers Demanding Bigger Raises. Could It Lead to a Wage-Price Spiral?

Wage increases prompted by higher prices could protect workers while potentially fueling inflation, economists say

By David Harrison and Sarah Chaney Cambon of The WSJ. Excerpts:

"The COLA is making a comeback.

Higher prices, a worker shortage and a revitalized labor movement are bringing about the return of pay increases tied to inflation, known as cost-of-living adjustments, or COLAs.

On Tuesday, striking workers at food maker Kellogg Co. ratified a contract that included a COLA, the second major labor agreement in recent weeks to feature such pay adjustments. Analysts say COLAs could spread in future negotiations between employers and unions.

Under a COLA, a worker’s pay rises to compensate for the increase in consumer prices. The idea is to protect wages in times when consumer prices are rising rapidly and unpredictably.

The provisions were often part of union contracts 40 or 50 years ago when inflation was high. Starting in the 1990s, as inflation slowed to more modest levels, COLAs became less prominent.

Now, resurgent inflation is leading some workers to ask for higher wages. Annual inflation in November accelerated to 6.8%, the Labor Department reported, the fastest in 39 years."

"“COLAs exist not primarily because inflation is higher, it’s because there’s uncertainty about inflation,” he said [Harry Katz, an economist at Cornell University]. The provision “provides a way of basically sharing the risk.”"

"COLAs could also themselves contribute to inflation. Raising wages to compensate for higher prices could lead to a situation in which companies raise prices to recoup higher wages, which causes workers to ask for yet higher wages, causing the two to feed off each other."

"Such a wage-price spiral emerged in the 1970s and was broken only by tighter monetary policy, Mr. Walden said [Michael Walden, professor emeritus at North Carolina State University]."

"Michael Walden, professor emeritus at North Carolina State University"

"A shrunken labor force, combined with a strong demand for labor, has given workers greater bargaining power. That could prompt more unions to ask for COLAs."

This related post has a graph with aggregate supply and aggregate demand. Past QF or the full-employment GDP is when workers get this greater bargaining power and prices are rising high enough that they seek COLAs.

Fed Focuses on Inflation Sentiment

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