The Wage Price Spiral

I believe we are in a wage-price spiral caused mostly by the federal government. There is some easing in inflation rates, and that’s mostly caused by higher interest rates putting downward pressure on home and car sales, among other things.

Wages going up

However, wages should be looked at more closely. The major railroad unions were stopped from striking over medical leave benefits, though the 24% two-year increase in wages will be implemented. United Airline pilots last month shot down a contract offering an almost 15% raise over 18 months, and the American Airlines pilots union rejected a 19% raise over two years. Delta pilots will receive a 31% pay bump over three years, with 17% as soon as the agreement is inked.

The finding workers dilemma

Finding workers continues to be a serious problem and one I believe will not be solved without substantial increases in wages. The labor participation rate among males ages 25 to 54 has decreased 1.7 percentage points since January of 2020 versus .5% for all ages. There appear to be several reasons for this. First, generous COVID transfer payments increased excess savings by $1.7 trillion above pre-pandemic levels. Child tax credits of up to $3,600 per child (an amusing misuse of a term which is actually a welfare payment), a $227.00 per month food stamp benefit that no longer has a work requirement, waiver of student loan payments, and other money transfer programs have made work optional for millions. One employer reported to me that the young men he was trying to hire for vehicle repair and maintenance were living at home and were unwilling to work for less than 50% more than he felt he could afford to pay. Low skill jobs like house cleaning do not pay enough to cover the costs associated with having to go to work, such as childcare and transportation costs.

Minimum wage

Maybe the current administration feels that the best way to raise the minimum wage is to have high enough transfer payments to force employers to pay more to get employees. So far the average increase in pay for the American worker is 2 percentage points below the current inflation rate.

Reshoring

Another force at work on the inflation front is the reshoring initiative that’s been going on now for over a year. I’m in favor of the idea of reducing our dependence on foreign suppliers as we all have seen what it has done to the supply chain over the last couple of years. Unfortunately, wage rates in the US are on the order to 5 to 10 times what they are in Asia and two to three times what they are in Mexico. Reshoring will have an obvious impact on increasing prices for goods manufactured in the US. What is going on in South Korea, where robotics is playing an increasing role in manufacturing, suggests downward pressure on the cost of production. (Have you seen that robot coffee maker at San Francisco International Airport?) So, increased automation puts downward pressure on costs, which puts downward pressure on wage increase demands, but is likely to produce an increase in unemployment. I’m hip to the old argument that increased automation creates new and better paying increased skill level jobs, but the problem is creating the supply of workers with those increased skills. Silicon Valley wages suggest that the cost of filling such jobs is probably two to five times what that person would make in a job that was replaced by automation.

So what does all this mean for your business?

AI and automation are tools you may or may not be able to take advantage of. Can you raise your prices to make up for increased wages? I have been to this movie before. Let’s chat about what to do about it,?book a call here.