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Tag: labor market
Are Wage Increases Driving Inflation? Not This Time

Are Wage Increases Driving Inflation? Not This Time

A popular line on our recent surge of inflation is that an over-tight labor market has led to rapid wage growth, which in turn forces companies to raise prices. Higher prices in turn lead workers to demand higher wages, which will give us a wage-price spiral and soon lead to double-digit inflation.

While this was a story that plausibly fit the data in the 1970s, it is very hard to make the wage-price spiral fit the current situation for a simple reason: The wage share of income has fallen sharply since the pandemic. By wage share I mean total compensation to workers, including fringe benefits, not just cash wages and salaries.

Here’s the picture:

Worker Share of Net Income Decline chartFederal Bureau of Economic Analysis

As can be seen, the wage share of corporate income had been recovering gradually from the troughs it hit in 2014 following the Great Recession. However, we see a sharp reversal in 2021, with the wage share falling from 76.1 percent to 73.7 percent, a decline of 2.4 percentage points.

Perhaps some economists can tell a story where rapid wage growth is driving inflation even as the wage share of income is falling, but I’m not that good an economist. [Editor’s Note: “Good” as in dishonest.]

This still looks to me like a case where supply-side disruptions, associated with the economy reopening from the pandemic together with the war in Ukraine are driving inflation.

This view is consistent with the fact that year-over-year inflation in the European Union was 7.5 percent as of March. The EU countries did not have as big a stimulus as the United States and by most measures the EU labor market is not as tight as in the United States.

Published with permission from DC Reports. Dean Baker co-founded the Center for Economic and Policy Research in 1999. His areas of research include housing and macroeconomics, intellectual property, Social Security, Medicare and European labor markets. He is the author of several books, including "Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer."

U.S. Economy Returns To Pre-Pandemic Level As Labor Market Improves

U.S. Economy Returns To Pre-Pandemic Level As Labor Market Improves

By Lucia Mutikani WASHINGTON (Reuters) - The U.S. economy grew solidly in the second quarter, pulling the level of gross domestic product above its pre-pandemic peak, as massive government aid and vaccinations against COVID-19 fueled spending on goods and travel-related services. The pace of GDP growth reported by the Commerce Department on Thursday was, however, slower than economists had expected. That was because businesses had to again draw down on meager inventories to meet the robust demand. Supply constraints, which have resulted in shortages of motor vehicles and some household applian...

August’s Weak Job Growth Appears To Be Anomaly, Economists say

August’s Weak Job Growth Appears To Be Anomaly, Economists say

By Jim Puzzanghera, Los Angeles Times

The disappointing 142,000 net new jobs added to the economy in August — the second straight month of slower growth — appears to be an anomaly and is not reason to panic that the recovery is faltering once again, economists said.

Although the Labor Department figures released Friday were the worst since December, it still was just one bad month after the best job creation streak since the dot-com boom, they said.

And there are some key reasons why the August report might have understated the health of the labor market, such as a grocery store strike in New England and seasonal adjustment problems with auto manufacturers.

“I don’t want to sugarcoat it. This this wasn’t a good report,” said Gus Faucher, senior economist at PNC Financial Services Group. “But I do think the economy is better than this and the labor market is better than this.”

The Obama administration echoed those sentiments Friday.

“Although the pace of job gains in August was below recent months, the broader trends are moving in the right direction,” said Jason Furman, chairman of the White House Council of Economic Advisers.

But Douglas Holtz-Eakin, a former Bush adminstration official who was a top economic adviser to 2008 Republican presidential nominee John McCain, said the report was bad news for the recovery.

“The spin will be to ignore this as a data anomaly, but the reality is that it is another piece of evidence against the notion that the economy will accelerate significantly in 2014,” said Holtz-Eakin, president of the American Action Forum think tank.

Job growth in August was well below economists’ expectations for 230,000 net new jobs and at least temporarily dashed growing optimism that the labor market finally had settled into strong and consistent growth.

The economy had added more than 200,000 jobs for six straight months, the best stretch since 1997.

The Labor Department also revised down job growth for June and July by a total of 28,000 positions.

The unemployment rate dropped a tenth of a percentage point to 6.1 percent last month, as expected.

But the drop came because the labor force participation rate also fell. It ticked down to 62.8 percent, matching the lowest level since 1978. The number of discouraged workers rose by 34,000 to 775,000.

Some key sectors had poor showings in August, led by retail.

The industry shed 8,400 jobs after adding nearly 21,000 in July. A key factor was the loss of 17,000 jobs at food and beverage stores in August.

But the Labor Department noted the industry was affected by a strike at the Market Basket grocery store chain in New England, which has 25,000 employees.

The strike ended last week.

“The strike did take people out of the workforce and the strike was settled,” said Jack Kleinhenz, chief economist at the National Retail Federation.

He said it’s not time to panic about the jobs market, noting other indicators imply the economy is doing better.

“When you think about the economy as a jigsaw puzzle, this is a puzzle piece that just doesn’t fit,” Kleinhenz said of the August jobs report. “I don’t believe it’s a cause for alarm, or that the direction of the economy is changing.”

In a positive sign for retail, the Kroger Co. said Friday it would hire 20,000 workers. It’s the nation’s largest grocery store chain.

Initial jobless claims have been averaging about 300,000 a week, a low level that indicates a healthy labor market. And private readings on manufacturing and service sector growth have pointed toward strong growth.

“There’s been nothing out there right now flashing a red light saying expectations need to be scaled back,” said Mark Hamrick, Washington bureau chief of Bankrate.com, a financial information website.

“I really can’t find any reason to believe that this is something that is more than a one month occurrence,” he said.

After adding 28,000 positions in July, manufacturers last month did not increase their payrolls at all for the first time in more than a year.

A key reason was employment at motor vehicle and automotive parts factories falling by 5,000 after an increase of 13,000 positions in July.

But those numbers appeared to be misleading.

Auto sales have been strong and that led to changes in when the industry shut down factories for the annual summer retooling, which affects the Labor Department’s seasonal adjustments to the jobs numbers.

“Firms in this industry laid off fewer workers than usual for factory retooling in July and recalled fewer workers than usual in August,” said Erica L. Groshen, commissioner of the Bureau of Labor Statistics. “This contributed to a seasonally adjusted increase in July and decrease in August.”

Some economists expect August’s job growth numbers to be revised up next month.

Faucher predicts the number will end up closer to 200,000, which he believes is the underlying pace of job growth.

“It was going to be difficult to keep up that 200,000 (job growth) streak, but I don’t’think its going to be difficult to keep up that 200,000 pace,” Faucher said.

Although the economy might fall below that figure for a month or two, that should be the average going forward, he said.

Even with August’s poor performance, job growth is averaging 207,000 during the past three months.

AFP Photo/Justin Sullivan

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U.S. Producer Prices Creep Up In July

U.S. Producer Prices Creep Up In July

Washington (AFP) — U.S. producer prices edged higher in July, with gains slowing sharply from the prior month, official data released Friday showed.

The Labor Department said its producer price index rose 0.1 percent in July, after a 0.4 percent increase in June.

Rises in services prices, primarily in transportation and warehousing, accounted for the PPI increase, while goods prices were unchanged, the department said.

Analysts on average had forecast a 0.2 percent increase.

Excluding food and energy prices, the PPI rose 0.2 percent in July, matching estimates.

Food prices rose 0.4 percent while energy prices declined 0.6 percent, including a hefty 2.1 percent fall in gasoline prices.

The year-over-year increase in producer prices fell for a third straight month, to 1.7 percent.

The report showed tepid inflationary pressures as the U.S. economy continues to grow at a modest pace.

“Pipeline pressures from core materials prices remain very muted, so the only threat here comes from companies seeking to offset feared/actual higher labor costs by lifting prices,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a client note.

The Federal Reserve, with a dual mandate of price stability and maximum employment, has said inflation remains below its 2.0 percent target over the long run.

The Fed’s preferred inflation measure, the personal consumption expenditures price index, slowed to an annualized 1.6 percent rate in June from 1.8 percent in May.

AFP Photo/Bill Pugliano

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