Worker Pay Is Rising, But Their Piece of the Pie Is Shrinking
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What is the main topic discussed in this episode?
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Here's your money briefing for Wednesday, February 8th. I'm J.R.
Why does the Fed worry that rising wages could keep inflation above 2%?
Whelan for The Wall Street Journal. Hourly wages grew 4.4 percent in January compared to a year ago. That's good news for workers, but it worries the Federal Reserve, which feels worker pay is rising too fast for it to be able to get inflation back down. But many see this problem from the perspective of workers, whose efforts to get ahead financially have hung in the balance for decades.
So this idea that wage growth in excess of productivity is going to lead to higher inflation is kind of predicated on the idea that labor's share of income is unchanging. And that just hasn't been true.
On today's show, we'll talk to Wall Street Journal Hurt on the Street columnist Justin Lehart about how rising worker pay has masked the fact that workers have been losing ground financially for years. That's after the break.
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We often hear that rising hourly wages play a role in keeping inflation stubbornly high. But is that formula a sure thing? Not exactly. Justin Lehart writes for the Wall Street Journal's Heard on the Street section, and he examined the relationship between rising wages, inflation, and the fact that worker pay may be rising, but their piece of the pie has been shrinking.
How does the Fed link wage growth to a potential wage‑price spiral?
Justin, thanks so much for being with us. Thanks for having me. First of all, Justin, can you just sort something out for us? Why is Fed Chairman Jerome Powell so concerned about rising wages? And how does inflation work into this?
Yeah, he and the Fed are worried that if wages go up too fast, then they're essentially going to be just passed on to consumers. So as employers' wage costs go up, they'll pass that along in the form of higher prices, and that will make inflation go up. And then, you know, in turn, people will want even higher rate wages to deal with that increased inflation. And you get to this sort of wage inflation spiral. So that's sort of the worst case scenario.
And then we keep hearing about interest rates, which also enter this equation.
Right. So that's why the Fed is raising rates in order to cool down inflation. Inflation has been cooling down. It's not cool enough yet, but it's starting to cool down. But the job market is just incredibly strong, as we saw with last Friday's employment report. So the concern there is that because the job market is strong, because unemployment is low, that workers will have a lot of bargaining power, that it'll drive up wage costs.
OK, but as much as Powell has talked about wage growth contributing to inflation, he has also said that he wants wages to go up strongly. What's the thought process behind that?
Yeah, so the Fed has an inflation target. It wants its measure of inflation to generally go up by about 2% a year. But there's more to it than that. The other thing that happens is productivity. So if I'm more efficient as a worker and I produce more in an hour, then I should get more money for that as my efficiency goes up along with whatever I need to keep up with inflation.
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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:00–0:39
2
Why does the Fed worry that rising wages could keep inflation above 2%?
0:39–2:24
3
How does the Fed link wage growth to a potential wage‑price spiral?
2:24–5:41
4
Why does the Fed still want wages to rise despite inflation concerns?
5:41–8:15
5
How should productivity and inflation together determine acceptable wage gains?
8:15–8:31
Speakers
3 identifiedMore from WSJ Your Money Briefing
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