At one level, the wages and salaries employers pay their workers are just another price — in this case, the price you pay for the use of someone’s time and effort. If I were a Marxist (which, by the way, I am very much not), I’d say that in a capitalist system, employment becomes commodified, a purely monetary transaction rather than a human relationship.
But employment is, in fact, a human relationship, and this makes a difference even in a market economy.
You can see this difference in the numbers, by comparing the behavior of wages over time with those of goods everyone agrees are commodities. Here’s the movement since 2002 of two prices, of oil and of U.S. labor, as measured by the Employment Cost Index (more on that shortly):
Oil prices have alternately plunged and soared, depending on demand and supply conditions in the global market. Wages haven’t; they’ve grown continuously, although the rate of growth has varied a bit. Why the difference?
Bear in mind that there were two episodes of mass unemployment over that stretch, after the 2008 financial crisis and during the Covid pandemic. Post-2008, in particular, unemployment benefits were quite limited, and many Americans were desperate for work. Why didn’t employers take advantage of this desperation by demanding that workers accept big pay cuts? After all, there were plenty of other workers who would be eager to take their jobs if they refused.
Well, in 1999 the Yale economist Truman Bewley published a book on this topic, “Why Wages Don’t Fall During a Recession.” Unusually for an economist, he tried to answer the question by actually talking to people — specifically employers, who seemingly could have demanded givebacks from their workers during the 1990-91 recession and the long “jobless” recovery that followed. Why didn’t they take advantage of the opportunity?
The answer, he found, came down to the fact that workers aren’t barrels of oil or bushels of soybeans. They’re people, who, among other things, get upset when they feel taken advantage of. Nobody worries about the feelings of a barrel of oil; employers worried that cutting wages, even during an economic downturn, would hurt their employees’ morale and that the resulting damage would outweigh any cost savings.
Economists had long known that wages are sticky — that is, not very responsive to economic conditions. Bewley’s work helped explain why.
And the fact that wages are different from other prices explains why serious discussion about the inflation outlook hinges a lot on what is happening to wages. Falling gas prices are giving Americans quick relief, and there are early indications that the Fed’s interest rate hikes are leading to falling prices or at least a sharp slowdown in inflation across much of the economy. But this disinflation won’t be durable unless wage increases come down.
True, wages aren’t the only or even the most important driver of recent inflation. But we won’t be able to get inflation down to the Fed’s target of 2 percent if wages are rising at an annual rate of 6 percent, the way they appeared to be in late 2021 and early 2022. Wage growth doesn’t have to drop all the way to 2 percent — because producers can partly offset rising wages with higher productivity — but stabilizing inflation will mean getting wage growth down considerably. Goldman Sachs says 3.5 percent would do it. To be honest, I think that’s a bit optimistic.
So how’s it going? Infuriatingly — but all too common these days — different statistics are telling different stories. You might think that we can look just at average wages. But that data was very distorted during the worst of the pandemic slowdown, surging because lower-paid workers were laid off in large numbers, then falling as they came back to work. It’s not obvious that anything similar is happening now, and the average wage has been showing a steady decline:
There are, however, other measures. The Bureau of Labor Statistics produces the Employment Cost Index, which is supposed to correct for the kind of composition effects that distorted average wage numbers in 2020. The Fed prefers a version of the E.C.I. that excludes incentive payments (basically bonuses), also shown in the chart. And while it’s down a bit in the latest release, there’s less evidence of a sustained decline and it’s still running above 5 percent.
All of which leaves things … unclear. But inflation looks harder to tame than I hoped it would.
