As Inflation Rises, It’s Even Harder to Get a Raise

Hourly earnings in June grew 2.7 percent from a year earlier. That’s more or less in line with the pace of the past two years. But now those modest wage gains are worth less in the real world. The reason: The prices of goods and services are picking up. In May, inflation hit 2.8 percent and grew faster than wages, which increased 2.75 percent.

.. The White House has contended that corporate tax cuts, like those enacted last year, will prompt companies to make investments that improve productivity and thus enable them to pay employees more. (Productivity measures output per worker.)

So far, that virtuous cycle does not seem to be taking hold. And some economists are skeptical that it will. Companies have had the ability to invest cheap capital for years, and wages have not risen strongly.

.. “A lower cost of capital may lead to more investment that may lead to more productivity growth, but to assume that will trickle down to middle-class wages flies in the face of everything we’ve seen for the last 20 years,” said Jared Bernstein

.. the effective personal tax rate had not changed much in the past year, edging down to 12.21 percent in May, from 12.25 percent a year earlier.

.. He noted that inflation-adjusted wages had in recent years grown more or less in line with productivity, which has itself been lackluster.

But wages could soon outpace productivity, Mr. Zandi predicted, because companies will have to pay higher wages to attract and retain workers.


Inflation? Bring It On. Workers Could Actually Benefit.

as is too often the case when workers finally start to see some of the benefits of growth, economists are warning that higher wages will lead to inflation, and they’re calling for the Federal Reserve Board to hit the brakes by raising interest rates.

What if we tried an experiment and waited until inflation actually began to rise substantially before raising interest rates too quickly? Even if prices did rise, my hypothesis is that the benefits, especially for those who haven’t gained from economic growth in recent years, would exceed the costs of higher inflation.

.. It’s not exactly clear why prices haven’t risen very much. It may be because greater international competition keeps prices down; because the decline of union contracts means that fewer companies give automatic cost-of-living adjustments; because consumers can compare prices so easily on the internet; because oil prices have fallen recently; or simply because, after years of low inflation, people expect price increases to be limited.

..  the costs of the Great Recession were enormous — at least $4 trillion in lost income, or about $30,000 per household

.. a high-pressure economy run over a longer period will actually increase that potential by pushing firms to improve productivity and draw more workers into the labor market.

The economy is on a sugar high, and tax cuts won’t help

Consensus expectations for 2018 are only marginally greater today than they were before the election.

.. The U.S. stock market has been very strong, rising by close to 25 percent since the election, which is far more than most observers expected a year ago. This appears to be heavily driven by increases in corporate profits. But performance is running behind that of Japan and Germany, belying the idea that the market is being driven by U.S.-specific policy factors.

.. If something fundamental had happened to improve the U.S. business environment, we would have seen capital inflows and an appreciating currency.

.. Even very innovative companies such as Apple and Google cannot find enough high-return investments and so choose to engage in large-scale share repurchases.

.. There will be no meaningful and sustained growth in workers’ take-home pay without successful measures both to raise productivity growth and to achieve greater equality. Only in this way can we achieve healthy growth.

.. The bipartisan Simpson-Bowles budget commission was surely not biased toward big government. Yet it concluded that the federal government needed a revenue base equal to 21 percent of gross domestic product. The tax-cut legislation now under consideration would leave the federal government with a revenue basis of 17 percent of GDP — a difference that works out to $1 trillion a year within the budget window.
.. This will further starve already inadequate levels of public investment in infrastructure, human capital and science. It will likely mean further cuts in safety-net programs and cause more people to fall behind. And because it will also mean higher deficits and capital costs, it will likely crowd out as much private investment as it stimulates.

The Link Between Productivity and Pay Is Very Much Alive, Summers Paper Finds

But a new study co-authored by Harvard University economist Lawrence Summers says that’s wrong. He and Anna Stansbury, a doctoral student at Harvard, found a strong and persistent link between hourly productivity and a variety of wage measures since 1973. The problem, they conclude, is that the positive influence of productivity on pay has been overwhelmed by other forces pushing the other way.

.. between 1973 and 2015, they found that a one-percentage-point increase in productivity growth generally led to a 0.5- to one-percentage-point increase in average or median pay growth, depending on the type of workers measured. Yet while productivity and wage growth tended to moved together over these short periods of time, there was enough of a difference in growth rates that over time a huge gap opened up between the pay and productivity. By 2015, productivity was up 73% from 1973 but wages were up just 12%.

.. they say other forces such as weaker unions were eating away at the ability of workers to share fully in the rise in productivity.

.. The late 1990s was one of the few times since 1973 when worker pay grew briskly, but that, he says, was probably because unemployment was around 4%, not because productivity was growing rapidly.

.. Productivity almost always grows faster than pay. “It’s a matter of whether you want to look at the glass half full or half empty,” Mr. Mishel says. “We’re saying it’s half empty, at best.”