Inflationary alert from the unions?

Hello. Here’s a rule of thumb: don’t try to overthrow a great democracy wearing bright orange pants and a tie. Send us your own rules of life: [email protected] and [email protected].

Are unions an indicator of persistent inflation?

We wrote on Monday about the resilience of US wage growth, which, with inflation above 7%, is spooking investors. You hear different phrasings as to why (“cost push spiral”, “wage price persistence”), but the guideline is the same. Prices and wages are linked and once the two rise, the two must be forced down together.

It’s worth thinking about, but it’s also worth appreciating that most US observers do not suspect that a 1970s-style price and wage spiral is in sight. This is notably not the case in the United Kingdom, where the debate on the wage-price spiral is very lively. This table probably has something to do with it:

The argument here is that the spiral of the 1970s depended on cost-of-living wage adjustments written into collective agreements, creating a fixed relationship between wages and prices. Everyone understood that wages and prices would continue to rise and acted that way. Inflation expectations soared.

But now, organized labor in the United States is small, cost-of-living adjustments aren’t prevalent, and companies can be smarter about price increases.

Could this change? On the margins, this is already the case. From railroad workers and teaching assistants to Starbucks and Amazon, this year’s surge of labor action was hard to miss. Cornell’s tracker finds a 10% increase in strikes and protests, while data from the National Labor Relations Board shows a sharp increase in new union applications.

A combination of a post-lockdown rebound and a tight labor market likely explains the change, but that doesn’t necessarily mean it’s temporary. Tight labor markets may be here to stay. BlackRock’s internal think tank pounded the drum on this:

A smaller share of the US population is in the workforce than before Covid. That’s unlikely to change, we think. Why? The labor force participation rate, or the share of people aged 16 and over who have or are looking for a job, plunged when the pandemic hit and people left the labor market [orange line below]. Some of this steep decline was offset by people returning. But we don’t see it recovering any further as the effects of population aging explain most of the remaining deficit. More people have reached 64, the age at which most retire. That took 1.3 million out of the workforce in October, we estimate. Another 630,000 left as the pandemic caused fewer people to pass retirement age and accelerated the retirement of those reaching 64. . .

This implies that the labor force will continue to shrink relative to the population. Economic activity will need to run at a lower level to avoid persistent wage and price inflation, especially in the labor-intensive services sector.

Here is their table:

We recently spoke to Ian de Verteuil, CEO of CIBC, who argued that investors aren’t giving it enough thought. He concedes that in general the position of organized workers is diminished. But he points to wage increases already written into collective agreements. Using a database of union contracts covering 350,000 workers, he calculates that an average wage growth of 4% is locked in for each of the next three years (except 2023, at 6.7%):

[Union contracts] are the only place where you can see one, two or three. Lots of data on salary expectations [investors use] is backward. But if someone trades a contract in the third quarter of 2022 at 6.7%. . . then we start locking down those higher levels.

Why are [employers] are you still hiring if you see the slowdown? Part of that is, ‘Gee whiz, we fired everyone during Covid, and we couldn’t get them back.’ So even if I have a slowdown, do I let the worker go? . . .

In an environment where we don’t have enough workers right now, where we’re bringing manufacturing back to the United States, where unions are starting to demand more and more, where employers are still trying to hire, it’s an environment that makes inflation stickier than you think.

Union density, de Verteuil said, doesn’t have to budge for wage pressures to persist; what unions demand is indicative of working conditions in general.

Along the same lines, Claudia Sahm of Sahm Consulting pointed out to us that fear of unions can be as important as unions themselves:

We’ve had this labor shortage long enough that you can see companies pulling these levers [of better pay and accommodations]. Because what they want to avoid more than anything is a union, because a union makes them pull the levers.

But Sahm welcomes the recent spurt in wage growth and isn’t too worried about a possible pass-through from wages to prices, citing recent IMF research that found such episodes are historically rare. She points out that rising wages are likely to eat into margins, but companies are often reluctant to raise prices quickly for fear of losing customers.

This is, in our opinion, one of the most important macroeconomic questions at the moment. We would like to know for sure what will happen. But the rise in union strength suggests that the influence of workers is not disappearing, even if a recession ends. We suspect this strength can co-exist with 2% inflation, but with low confidence. Tell us what you think. (Ethan Wu)

A good read

Chamath Palihapitiya is not to blame, says Chamath Palihapitiya.