Wage Inflation

       "I think we're experiencing a big uptick in inflation. Bigger than many expected. Bigger than, certainly, I expected."

        Federal Reserve Chair Jerome Powell

Car rental in Maui last week: $1,002 dollars per day.

My friend refused to pay it. He and his family stayed at the hotel and didn't go anywhere. They got there from the airport by Uber, for $120, one way. Drinks at the bar were $18 each.

My wife has a 50th college reunion in Rhode Island at the end of September. The car rental in Providence is $120 a day. I am paying it. What choice do I have? Lumber prices tripled in the past year. I know because I had the time staying at home to notice that the deck off my living room needed repair, which turned into replacement. I paid the extra cost. The under support beams had dry rot. What choice do I have?

The contractor doing the repair work charges me $45/hour. Some of the work is a two-person job, involving putting sixteen-foot 2-by-12 supports into place. He could not find a worker at any price near what he had previously been paying. A friend is helping him out, working in the cool of the mornings here--at $30 an hour. 

The Fed Chairman was telling Congress to relax, that they are on top of this, and inflation was a short-term adjustment, not permanent. The idea circulating is that these are simple one-of-a-kind shortages due to COVID adjustments. The car rental companies raised cash by selling off their fleets a year ago, when demand plummeted. Chip manufacturers switched from making chips for cars into making chips for video conference calls. The result is that new cars are hard to buy and used car prices are way up and car rental companies are charging more to re-coup the costs of the emergency re-build of their fleets. The cost of Uber is due to drivers demanding more. The cost of the drink was due to a shortage of bar staff. Supposedly things will settle out and go back to the pre-COVID normal. 

Or not. The 15 months of life amid COVID changed some attitudes and expectations. We saw the jobs of a lot of working people defined as "essential," and we saw mothers of young children pulled out of the workforce to care for and home-school young children. They were draftees into America's army in the war against COVID. That paved the way politically for "Biden Bucks," the $300/month to most parents who have children under seven, and $250/month to most parents with children from seven to 18. The eligibility is broad based, including some 85% of families, positioning it less like a needs-based poverty program and more like an entitlement of citizenship. It is family-friendly income distribution. It is popular.

Enhanced unemployment benefits for COVID served as a replacement for private sector unionization. Workers who previously worked at or near minimum wage had the practical ability to withhold their work. Employers needed to pay up to get workers to show up--and still are. Customers are paying more. 

Wages are sticky. There is powerful messaging embedded in a wage. People adjust their lifestyle to a wage, but also their sense of the value and the respect due their effort as a worker. Losses are experienced more acutely than gains. Someone whose wage might drop from $17/hour back to $13/hour, because the dislocations caused by COVID are over, would experience this supply/demand adjustment as a demotion and insult. I expect wages to stay up. Employers and consumers will adjust.

COVID did what minimum-wage legislation cannot: Raise the incomes of workers in the bottom quarter of the income scale. Those workers were surviving because of public benefits, especially government-subsidized health care. There was a wealth transfer from taxpayers and "good employers" who provided benefits, to employers who did not. It is not more inflationary for McDonalds and Walmart to pay for employee health care than for taxpayers to pay for it. It just moves the payee--but we will measure this as inflation. 

Will wage-inflation mean some overall long-term inflation? That would be my expectation, yes. Net-net that would be a good thing for workers, and less good for the owners of capital, a reversal of the trend of the past forty years. Owners of capital have taken a greater and greater share of the GDP pie. We may have greater social peace--domestic tranquility--if that trend reverses and workers start doing better.  I expect that, too.