First, let’s get a couple of things straight.
Workers aren’t causing inflation; real wages are falling, and corporate profits are fatter.
In Britain, Treasury officials claimed “there was an inflationary risk from workers expecting wages to keep up with price rises,” and Bank of England Governor Andrew Bailey called for “restraint in pay bargaining” (see story here). That’s poppycock.
IMF’s chief economist, Pierre-Olivier Gourinchas, told CNBC “What we’ve seen in the last year is prices rising very rapidly, but wages have not increased nearly as much, and that’s why we have a cost of living crisis” (same story).
In the U.S., as in Britain, government officials feared a 1970s-style wage-price spiral, but that hasn’t happened. What we have is a “profit-price” spiral. If you suspect companies are taking advantage of the inflation mentality to price-gouge consumers, you’re absolutely right. They could do that because consumers hoarded cash during the pandemic, and when they finally started spending it, demand outstripped supply.
Richard Portes, a London economics professor, “told CNBC there is ‘no serious risk’ of a wage-price spiral in the U.K., U.S., or major European countries” that would result from a wage catch-up. He says, “If you look at core inflation in the U.S., rentals, housing, have been driving that. That’s got nothing to do with wages — with rentals, it’s more sensitive to interest rate rises.” The Federal Reserve has been deliberately push up interest rates in the mistaken belief that a tight labor market is causing inflation.
Wages have risen, but prices have risen more, which means workers are actually earning less. To blame inflation on them is ridiculous. One of the reasons for a labor shortage is because a lot of people who don’t want to work for effectively lower wages, especially in jobs that were low-paying to begin with, are staying out of the labor market.
Where is all the money going? Given that workers are actually earning less, obviously not to them. Given fatter corporate profits, the answer is obvious.
Don’t listen to corporate types wringing their hands over a “worker shortage.” If they pay them, they’ll come. Wages need to catch up with higher prices, not be suppressed. Do that, and you’ll have even fewer workers. It’s basic supply-and-demand, which applies to the labor supply as it does to everything else.