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Monday, June 28, 2021
With inflation no longer Greenspan's 'q' word, here's why generous worker pay matters.
Does anyone remember the word “quiescent”?
It’s an economic catchphrase popularized by Alan Greenspan, the former Federal Reserve chairman who presided over an impressive run of strong growth and stable inflation.
During his lengthy tenure, the central banking éminence grise invoked “quiescent” to describe stable prices — mostly attributed to a mix of technology, high productivity and globalization — in the face of comparatively strong growth. He was also notoriously hawkish on wage-driven inflation (his broadsides against minimum wage hikes earned him the enmity of left-leaning economists).
With price pressures percolating everywhere, one wonders what the now-nonagenarian must think about the current economy and Fed policy, particularly in light of an acute worker shortage that’s prompting employers to hike wages.
On Friday, some data shed light on a dynamic that could complicate the Fed’s delicate act of navigating the Scylla of a scarred labor market, and the Charybdis of rising prices. Namely, workers are (finally) reaping bigger paychecks.
May’s personal consumption figures were largely in-line with expectations, but showed wages and salaries posting another consecutive month of gains. Separately, the University of Michigan's Consumer Sentiment Index dipped in June, but 32% of survey respondents in the top third income bracket saw their pay rise — and a small number expect to earn even more in the year ahead.
A defining characteristic of the post-pandemic labor market is that workers have, to some extent, recouped lost bargaining power. For better or worse, workers are holding out for fatter paychecks, demanding more flexible work arrangements — or just quitting their jobs altogether.
Previously, “the worker did not have that ability to command higher wages ... because we didn't have much in the way of broader inflation,” Kevin Flanagan, head of fixed income strategy at WisdomTree, explained to Yahoo Finance in a recent interview.
“Now we’re looking at a broader swath of when consumers have to pay more [and] now you can see the changing dynamic of workers trying to command higher wages,” he said. “And that’s the concern: If you start throwing wages into this mix, then the Fed will have an inflation problem.”
On one hand, higher pay is welcome news to cash-strapped workers. For years, stagnant wages amplified the searing debate over wage inequality, and were mostly responsible for eroding support for globalization and free trade — two of Greenspan's economic shibboleths.