Rising Wages: A Risk to the Economy, Too
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What is the episode's focus on rising wages and the economy?
This is Your Money Matters from The Wall Street Journal. Welcome to Your Money Matters. I'm J.R. Whalen in New York. It's taken a while, but wages are showing healthy growth in post-recession America, clocking in at 2.9% for the 12-month period ending in January. But Wall Street Journal heard on the street columnist Justin Lehart is here to explain why, despite that, there could be some potential bad news lurking in the offing. So, Justin, Wall Street has had concerns over how the low unemployment and rising wages impact has resulted in a tight labor market and potentially higher inflation. But you write in your column that inflation might not rise significantly, and there could be an impact on stocks, and Wall Street should keep an eye on that.
The thing about inflation, right, so people think, well, you know, labor market gets tight and then people have money and then they spend it and then prices go up.
Why might rising wages not automatically cause higher inflation?
There's a lot of steps there. And we don't necessarily have the step where prices go up after wages go up. It's not necessarily so. So just because everybody's sort of worried about that doesn't mean it's going to happen.
In your column, you raise some scenarios where wages could rise without pushing inflation higher. And one of those is corporate productivity. And despite all the recent stock market highs and low unemployment, productivity still has a lot of room to grow.
Right. So productivity growth has been super slow. And we would like to see if we see better productivity growth.
How can productivity growth offset wage increases without inflation?
then you can have better wage growth without inflation and without, you know, everybody's happy. So basically what happens is productivity is just how much people produce in an hour. So if people produce more in an hour, then you can pay them more and you don't lose on profits. You don't have to raise prices. Everybody's happy. The problem is that productivity has just been so weak and productivity growth isn't going to turn on a dime here.
And there's another scenario where you talk about inflation might not follow wage growth. And it's a bit more troubling for investors. And that is if companies absorb the rising labor costs.
Right.
What happens if companies absorb higher labor costs instead of raising prices?
So they probably don't want to absorb their rising labor costs. But just because they raise prices doesn't mean that people are going to bite on the higher prices. Consumers have really been conditioned to not seeing prices go up a lot because And so that's one reason we might not, you know, you might not get any of that price pass through. The other reason is that it's just it's such a competitive environment now. So if you're a retailer, you're if you're a traditional retailer, you're you're competing against Amazon and, you know, another company.
Yeah, the online marketplace has thrown a whole new game plan.
Yeah, it's huge. So how are you going to, you know, you have to think about competing against that. If you raise prices in that environment, well, maybe more of your customers just go online.
How does online competition affect companies' ability to pass wage costs to consumers?
So that makes it very hard for people to raise prices if they want to remain competitive. And, of course, we've seen online marketplaces, right, that's not just in traditional store retail now. People are going to everything, right? They're going into food, right? They might be going into medicine and prescription drug delivery, that kind of thing. So that's just a huge difference.
And this is a big balancing act for companies because, you know, they don't want to raise prices all that much. They don't want to scare away consumers. At the same time, they want to maintain the bottom line and they want to make sure that they keep the stock price healthy. And so it seems like a lot of plates in the air at one time.
How could the Federal Reserve's rate decisions change the wage–stock price dynamic?
Yeah, it's going to be difficult for them. Now, you also have to remember that profit margins are super-duper high right now. And they're going to be even higher because of the corporate tax cut. So they do have an ability to absorb some wage costs within their income statement. But for investors, it might not be exactly what investors expect. So it could be challenging for stock prices if that happens.
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Chapters
7 chapters
1
What is the episode's focus on rising wages and the economy?
0:02–0:59
2
Why might rising wages not automatically cause higher inflation?
0:59–1:34
3
How can productivity growth offset wage increases without inflation?
1:34–2:15
4
What happens if companies absorb higher labor costs instead of raising prices?
2:15–3:03
5
How does online competition affect companies' ability to pass wage costs to consumers?
3:03–3:44
6
How could the Federal Reserve's rate decisions change the wage–stock price dynamic?
3:44–4:43
7
When are the upcoming jobs report and Fed events that investors should watch?
4:43–6:05
Speakers
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