Dean Baker: If Wage Growth Is Driving Inflation, Why Is Workers’ Share of Income Falling?

 

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If Wage Growth Is Driving Inflation, Why Is Workers’ Share of Income Falling?

A popular line on our recent surge of inflation is that an over-tight  labor market has led to rapid wage growth, which in turn is forcing  companies to raise prices. Higher prices will lead workers to demand  higher wages, which will give us a wage-price spiral and soon lead to  double-digit inflation.

While this was a story that plausibly fit the data in the 1970s, it  is very hard to make the wage-price spiral fit the current situation for  a simple reason: the wage share of income has fallen sharply since the  pandemic.

As can be seen, the wage share of corporate income had been  recovering gradually from the troughs it hit following the Great  Recession in 2014.[1] However, we see a sharp reversal in 2021, with the wage share falling  from 76.1 percent to 73.7 percent, a decline of 2.4 percentage points.

Perhaps some economists can tell a story where rapid wage growth is  driving inflation even as the wage share of income is falling, but I’m  not that good an economist. This still looks to me like a case where  supply-side disruptions, associated with the reopening from the pandemic  and the war in Ukraine are driving inflation.

This view is consistent with the fact that year-over-year inflation  in the European Union was 7.5 percent as of March. The EU countries did  not have as big a stimulus as the United States and by most measures its  labor market is not as tight.

[1] Wage share actually refers to all labor compensation, Line 4, NIPA  Table 1.14. Corporate income is the sum of labor compensation and net  operating surplus (Line 8).