EDITOR'S NOTE: Remember how the Federal Reserve kept holding off on taking a hawkish monetary position through most of 2021, citing job market data and indications of a wage-inflation spiral as a potential trigger in its stance toward inflation? Well, workers were able to get a significant boost in 2021 followed by a few smaller increases in 2022. Overall, it’s tapered off. But still, these are “nominal” wage increases. For instance, from August to October this year, wages increased by an average of 3.9% on a nominal basis. “Real wages” declined significantly. And to get that number, subtract the current inflation rate of 7.7% from the 3.9% increase, and you’ll get a negative result. Instead of having gained 3.9%, workers lost 3.8% despite their pay raises.
If you (or someone you love) are not a metalworker in the German state of Baden-Württemberg, you could be forgiven for ignoring a new labor deal struck last week.
- But it is a story with surprising significance for the European economy — and one that resonates in the debate about U.S. wages and inflation.
Driving the news: The IG Metall union, whose 3.9 million members perform crucial work for Germany's auto industry, agreed to a 5.2% pay raise in 2023 and 3.3% in 2024.
- Yet that is markedly less than the 11.6% rise in German consumer prices notched over the last year.
Why it matters: While worker pay is rising faster than it did in the 2010s on both sides of the Atlantic, there are few signs that workers are achieving pay gains in excess of inflation.
- That is bad for standards of living — inflation really is making people worse off. But it's good news if you, like central bankers, fear an upward spiral of wages and prices.
The big picture: For all the discussion of how the tight labor market has increased workers' leverage, that is not translating into pay increases that keep up with inflation.
- Real compensation per worker was down in 31 of 32 major world economies in Q3 2022, compared with Q3 2021, according to the latest OECD data.
- In Europe, it is high-stakes labor negotiations like those involving the German metalworkers that drive wage trends. In America, unions are less prevalent, so it is millions of individual negotiations between workers and employers that drive wages.
By the numbers: U.S. wage data points to workers succeeding at attaining a one-time surge in pay in 2021 and the early months of 2022, but also suggests wage growth is receding to closer-to-normal rates.
- Average hourly earnings among private sector workers rose at a 3.9% annual rate in the three months ended in October. That's down from a recent high of 6.3% in late 2021 and 5.9% as recently as the three months ended in July.
What they're saying: "Real wages on average are falling, not rising," said Mary Daly, president of the Federal Reserve Bank of San Francisco, when speaking with reporters yesterday.
- "We don't have one of the fundamental ingredients of a wage-price spiral, which is wages rise with inflation and it's a vicious cycle upward. We don't see that."
- She added that in her Fed district, which encompasses much of the Western U.S., she was hearing widely of 4.5% to 5% wage increases last year, whereas that is looking like 3.5% to 4% for the coming year.
The bottom line: Rising nominal wages look more like an effect of high inflation rather than a major cause. That implies that the Fed, ECB and other major central banks could, conceivably, bring down inflation without crushing the labor market.
Originally published by Axios.