Jhe US Department of Labor’s January jobs report heightens fears that a supposedly “tight” labor market is fueling inflation, so the Fed needs to put the brakes on by raising interest rates.
This reasoning is totally wrong.
Among the largest job gains in January were normally temporary and low-wage workers: leisure and hospitality, retail, transportation and warehousing. In January, employers laid off fewer of these workers than in most years due to growing customer demand combined with Omicron’s negative effect on the supply of workers. Due to the Bureau of Labor Statistics’ “seasonal adjustment,” cutting fewer workers than usual for this time of year appears to be “adding a lot of jobs.”
Fed policymakers are poised to raise interest rates at their March meeting and then continue to raise them, in an effort to slow the economy. They fear that a labor shortage will drive up wages, which in turn drive up prices – and that this wage-price spiral will spin out of control.
This is a huge mistake. Higher interest rates will hurt millions of workers who will be unwittingly enlisted in the fight against inflation by losing jobs or long overdue wage increases. There is no “labour shortage” driving up wages. There is a shortage of good jobs with adequate wages to support working families. Rising interest rates will get worse this shortage.
Nor is there a “wage-price spiral,” although Fed chief Jerome Powell has expressed concern about wage hikes driving up prices. On the contrary, workers’ real wages have fall because of inflation. Even though overall wages have increased, they have failed to track price increases – which makes most workers worse off in terms of the purchasing power of their dollars.
Wage-price spirals used be a problem. Remember when John F Kennedy “chewed” steel executives and the United Steel Workers to keep a cap on wages and prices? But such spirals are no longer a problem. This is because today’s typical worker has little or no bargaining power.
Only 6% of workers in the private sector are unionized. Half a century ago, more than a third were. Today, companies can increase production by outsourcing just about anything, anywhere, because capital is global. Half a century ago, companies that needed more output had to bargain with their own workers to get it.
These changes shifted power from labor to capital – increasing the share of the economic pie going to profits and reducing the share going to wages. This change of power ended price-wage spirals.
The slowing economy will not remedy either of the two real causes of today’s inflation – persistent global bottlenecks in the supply of goods and the ease with which large corporations (with record profits) pass these costs on to customers at higher prices.
Supply bottlenecks are all around us. Just take a look at all the ships with billions of dollars in cargo idling outside the ports of Los Angeles and Long Beach, through which 40% of all US maritime imports to flow.
Large companies have no incentive to absorb the rising costs of these supplies – even with profit margins at their level. the highest level in 70 years. They have enough market power to pass these costs on to consumers, sometimes using inflation to justify even greater price increases.
“A little inflation is always good in our business,” said Kroger’s chief executive. said last june.
“What we do very well is pricing,” said the Colgate-Palmolive chief executive. said in october.
In fact, the Fed’s plan to slow the economy is the opposite what is needed now or in the foreseeable future. Covid is still with us. Even in its wake, we will face its adverse consequences for years to come: everything from long-term Covid to schoolchildren months or years behind schedule.
Friday’s jobs report shows the economy is still 2.9 million fewer jobs than it was in February 2020. Considering US population growth, it’s 4, 5 million to what it would have now if there had been no pandemic.
Consumers are almost exhausted. Not only are real (inflation-adjusted) incomes down, but pandemic aid has ended. Additional unemployment benefits have disappeared. Child tax credits have expired. Rent moratoriums are over. Small wonder consumer spending fell 0.6% in December, the first decline since last February.
Many people are understandably gloomy about the future. the University of Michigan Consumer Sentiment Survey fell in January at its lowest level since late 2011, when the economy was trying to recover from the global financial crisis. The Conference Board Index confidence also fell in January.
Considering all this, the last What average workers need is for the Fed to raise interest rates and further slow the economy. The problem most people face is not inflation. It’s a lack of good jobs.