Unions’ inflation warning?
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Are unions a bellwether of sticky inflation?
We wrote on Monday about the resilience of US wage growth, which, with inflation above 7 per cent, scares investors. You hear different formulations for why (“cost-push spiral”, “wage-price persistence”), but the throughline is the same. Prices and wages are linked and once both are rising, both must be forced down together.
That’s worth thinking about, but it’s also worth appreciating that most US observers don’t suspect a 1970s-style wage-price spiral is on the cards. That is, notably, not so in the UK, where the wage-price spiral debate is very much alive. This chart probably has something to do with it:
The argument here is that the 1970s spiral depended on cost-of-living wage adjustments written into union contracts, creating a fixed relationship between wages and prices. Everyone figured out pay and prices would keep rising, and acted that way. Inflation expectations soared.
But now, US organised labour is weak, cost-of-living adjustments aren’t widespread and businesses can be more judicious about price increases.
Could that change? On the margins, it already is. From rail workers and teaching assistants to Starbucks and Amazon, this year’s surge in labour action has been hard to miss. Cornell’s tracker finds a 10 per cent bump in strikes and protests, while National Labor Relations Board data show a sharp rise in new union applications.
Some combination of a post-lockdown bounceback and a tight labour market probably explains the shift, but that doesn’t necessarily mean it’s temporary. Tight labour markets could be here to stay. BlackRock’s in-house think-tank has been banging the drum on this:
A smaller share of the US population is in the workforce than pre-Covid. That’s unlikely to change, we think. Why? The participation rate, or the share of people aged 16 and over that have or are looking for work, nosedived when the pandemic hit and people left the workforce [orange line below]. Some of that sharp decline has been made up as people return. But we don’t see it recovering further because the effects of an ageing population account for most of the remaining shortfall. More people have hit 64-years-old, the age at which most retire. That’s taken 1.3mn out of the workforce as of October, we find. Another 630,000 left as the pandemic caused fewer people to work past retirement age and hastened retirement for people coming up to 64 . . .
That implies the workforce will keep shrinking relative to the population. Economic activity will need to run at a lower level to avoid persistent wage and price inflation, especially in the labour-heavy services sector.
Here’s their chart:
We spoke recently to Ian de Verteuil, a managing director at CIBC, who made the case that investors are not thinking enough about this. He concedes that, in general, organised labour’s position is diminished. But he points to the wage increases already pencilled into union agreements. From a database of union contracts covering 350,000 workers, he calculates that an average of 4 per cent wage growth is locked in for each of the next three years (except 2023, at 6.7 per cent):
[Union contracts] are the only place where you can see one, two or three years out. A lot of wage expectations data [investors use] is backward-looking. But if someone negotiates a contract in the third quarter of 2022 at 6.7 per cent . . . then we’re starting to lock in these higher levels.
Why are [employers] still hiring if you can see the slowdown? Part of it is, ‘Gee whiz, we fired everyone during Covid, and couldn’t get them back.’ So even if I have a slowdown, do I let the worker go? . . .
In an environment where we don’t have enough workers now, where we’re bringing manufacturing back to the United States, where unions are starting to demand more and more, where employers are still trying to hire, that is an environment that makes inflation stickier than you think.
The unionisation rate, de Verteuil said, doesn’t have to budge for wage pressures to persist; what unions are demanding is indicative of labour conditions more broadly.
Along similar lines, Claudia Sahm of Sahm Consulting noted to us that fear of unions could matter as much as unions themselves:
We’ve had this labour shortage long enough that you can see companies pulling these levers [of better pay and accommodations]. Because the thing they want to avoid more than anything else is a union, because a union makes them pull the levers.
But Sahm welcomes the recent burst of wage growth, and is not very worried about any wage-price feedthrough, citing recent IMF research that found such episodes are historically uncommon. She points out that rising wages will probably eat into margins, but that companies are often loath to increase prices quickly, for fear of losing customers.
This is, in our judgment, one of the most important macro questions right now. We wish we knew for sure what’ll happen. But the uptick in union strength suggests that workers’ leverage isn’t going away, even if a recession interrupts. We suspect that this strength can coexist with 2 per cent inflation, but with low confidence. Let us know what you think. (Ethan Wu)
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