Wage Inflation: The Stats and the Underlying Implications
In recent years, wage inflation has become a major topic of discussion in economic and political circles, with estimates suggesting wages have increased 16% over the past decade in the U.S. Alone. With wage inflation continuing to rise, questions about its implications have become more pressing.
Put simply, wage inflation means that the wages employees take home are experiencing a gradual and sustained increase in comparison to the prices of goods and services. This is significant because it means that households have more money to spend and this can often stoke consumer spending, helping to drive economic growth.
At the same time, wage inflation can create an artificially high level of inflation, which can create economic imbalances and potentially lead to an economic downturn in some cases. It is also important to highlight that wage inflation refers specifically to average wages, which means it does not necessarily represent the income of lower or middle-income households.
In terms of the current situation, the U.S. Bureau of Labor Statistics has reported that wage inflation is on the rise for the first time since the Great Recession, at 2.9% year over year in June 2020. This marks a pickup from the previous two years when wage growth was at or below 2%. The ongoing uncertainty of the Covid-19 pandemic means that the short-term outlook for inflation and wage growth is uncertain.
The underlying implications of wage inflation are numerous, with the most important being that it can create economic inequalities within a society. This is because rising cost of labor can make certain businesses unable to afford necessary labor costs and in turn struggle to stay afloat. Economically disadvantaged households also tend to experience less of the benefits of wage inflation in comparison to higher earners.
Ultimately, wage inflation can be both a positive and a negative force. It helps boost consumer spending, which is beneficial for the whole economy, but it can also create inequality and economic instability. Given the current situation, central banks and governments should look to create policies that take into account the underlying implications and keep wage inflation at a reasonable level.