Several very good primers were recently written on how to think about inflation in the coming months. But as the reaction to monthly price inflation numbers that ever tick above a 2% annualized rate continues to be disproportionately angst-ridden, another one may be useful.

Assessing this week’s data and the ongoing debate about inflation and economic “overheating” requires an understanding of at least four key points:

1. The source of inflationary pressure is crucial to assessing how policy should respond. Inflation coming from the labor market because workers are empowered enough to secure wage increases that run far ahead of the economy’s long-run capacity to deliver them (that is, productivity growth) is the only source of inflation that should ever spur a contractionary macroeconomic policy response (either smaller budget deficits or higher interest rates). This type of inflation is what worries about “overheating” center on.
2. Other sources of inflationary pressure are far more likely to be transitory and hence should not spur a contractionary policy response.
   • Inflation in the prices of commodities is often volatile and driven largely by global markets. Such price increases are likely to hinge on idiosyncratic drivers like weather changes, oil field discoveries, or rapid growth in large economies outside the United States. This kind of inflation should not spur a contractionary response. These price increases are not driven by economic “overheating”; engineering an economic “cooling” by reducing budget deficits or raising interest rates will not stop them—but it will cause a lot of collateral damage in slowing growth within the United States.
   • Inflation driven by very large relative price changes is also highly likely to be transitory and should not be met with a contractionary macroeconomic policy response.
3. Arguing that inflation stemming from many sources should not be met with a contractionary policy response does not mean that this type of inflation is good, or even just benign. Such inflation often does reduce typical workers’ living standards. But to be effective, anti-inflation policy must address such types of inflation with tailored measures, not across-the-board macroeconomic austerity.
4. Spillovers of inflation that begin outside the labor market but spark inflation driven by wage-price spirals are highly unlikely given the extremely weak bargaining position and leverage of typical U.S. workers in recent decades. This degraded bargaining position also suggests that unemployment rates might reach far lower levels than they did in past decades before spurring wage growth sufficient to drive excess price inflation.

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A number of high-profile Republicans in recent years have tried to claim that they have become the “party of the working class.” Nothing exposes this as false as clearly as the GOP’s unrelenting attacks on the Affordable Care Act (ACA)—legislation that was imperfect but still an enormously important advance in the U.S. welfare state.

The latest attack is another court case that made its way to the Supreme Court (California v. Texas)—which could have a ruling as soon as Thursday. Legal merits of the case aside (there were essentially none), the economic fallout of the case if it is decided in the plaintiffs’ favor would be profound, as the requested remedy is the abolition of the entire ACA.

The ACA was in some ways hugely complicated, but can be boiled down to five major undertakings:

• Strengthening employer-provided health insurance with mandates like no lifetime caps on benefits paid and an allowance for adults up to the age of 26 to be covered on parents’ plans;
• Providing needed regulation for the “nongroup” health insurance market (the market for people who can’t get insurance through their employer or through existing government programs);
• Providing subsidies to make purchasing nongroup plans more affordable for many;
• Paying for states to expand their Medicaid programs significantly; and
• Raising taxes on high incomes to pay for its spending provisions.

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Last month saw disappointing growth in payroll employment, with just 266,000 jobs added in April, when many expected a number well over 500,000 (and maybe even over a million). Ahead of tomorrow’s release of the jobs report for May, we want to put that headline number in perspective, particularly in how this relates to policy choices.

The Biden administration has clearly decided to go big on the amount of fiscal support they are going to provide the economy over the next year—passing the $1.8 trillion American Rescue Plan (ARP) on the heels of a $900 billion package passed in December. They are determined to not repeat the policy mistake that led directly to a lost decade of economic potential after the Great Recession in 2008-09, when the government provided too little fiscal support. It took 10 full years after the Great Recession just to regain the pre-2008 unemployment rate low point, and even when this unemployment rate low was regained in 2017, it was partly because labor force participation still remained depressed. All of this raises a couple of questions: Just how much faster can recovery be this time, and would another month as disappointing as April make this fast recovery impossible to attain?

We think one reasonable metric of success would be a full return to pre-COVID labor market conditions by the end of 2022. These pre-COVID conditions included an unemployment rate of 3.5% and a prime-age labor force participation rate of 82.9%. Restoring pre-COVID labor market health by the end of 2022 would require creating 504,000 jobs each month between May 2021 and December 2022. This average monthly jobs growth target starts from today’s 9.0 million “jobs gap” relative to February 2020, and includes the need to absorb growth in the working-age population over the next 20 months (this growth in the working-age population requires roughly 55,000 jobs per month on its own). Hitting this end-of-2022 goal would see the U.S. economy reach 4.0% unemployment by mid-2022.

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One of the most widely discussed data points from last month’s jobs report was the rapid acceleration in wage growth for the leisure and hospitality (L&H) sector, particularly among production and nonsupervisory workers. This sector-specific wage acceleration (not seen in other sectors), combined with disappointing economywide job growth for the month, launched a huge debate about potential labor shortages. We wrote previously about why concerns over labor shortages were largely misplaced. Among other things, the rapid wage growth in L&H was accompanied by very fast sectoral job growth, so there was no evidence that any labor shortage was impinging on overall growth.

Further, this acceleration of wages in L&H might provide less evidence of even a sector-specific labor shortage than previously thought. When economists or other analysts express concerns about labor shortages, they generally mean a shortfall of potential employees that forces employers to gouge deeper into their profit margins to raise wages to attract workers. At some point this gouging will become unsustainable and so hiring will lag.

However, there is compelling evidence that the wage acceleration in L&H in recent months is not driven by employers raising base pay to attract workers, but instead by just an increase in tips stemming from restaurants filling back closer to pre-COVID capacity. Put another way, since December 2020, the rise in tip income, not an increase in base wages, can likely entirely explain the acceleration of wages for production and nonsupervisory workers in restaurants and bars. If this is the case, the wage acceleration will stop when restaurants get back to normal capacity. The evidence that the L&H wage acceleration is largely just a resurgence in tip income is as follows:

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The COVID-19 pandemic has highlighted and exacerbated underlying disparities in the health and economic wellbeing of people across the country. Segregated cities and neighborhoods have devastated many—disproportionately Black and Hispanic communities—under the weight of the pandemic and the ensuing recession, while others have been less impacted. Some families have seen multiple family members and friends become seriously ill or lose their jobs, while others have come away relatively unscathed (and in some cases, prospered). Millions of workers have risked their health and the health of their families by going to work in-person, while others have been able to work from home and don’t regularly encounter those facing the pandemic’s wrath.

The bottom line: disparities persist between who can safely stay home and get a paycheck and who cannot.

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A person working eight hours per day with a one-hour round-trip commute—who sleeps for eight hours a night—spends over half of their waking life at, going to, or coming from their workplace. Aside from children, full-time students, and those who have lived long enough to collect Social Security benefits, Americans live their lives as workers. With the exception of the roughly 10% of U.S. workers who list themselves as self-employed1 and those who make their income from capital, that work takes place as employees.

Despite how much of American adult life is governed under employment agreements, most Americans also have little say over the terms of those agreements after they have been accepted. Most American workers are employed “at will,” meaning they can be fired by their employer at the employer’s discretion as long as the given reason does not violate federal law. If a worker is made to feel uncomfortable at work by a customer, or if the pace of work becomes stressful, or if conditions of their life change such that they need special accommodation, then in most cases solutions are up to the kindness of the employer to provide—there is nothing that requires them to do so.

Entering the workplace for most American adults can in that case represent an agreement to forfeit a degree of control over their lives in exchange for the wages necessary to live. If people do not have a voice in determining the pace and content of their time in the workplace, then in a real sense they lack control over the largest portion of their lives.

The core idea behind “civil rights” is that people should have the freedom to exist in political and social equality with one another. But under employment, an individual worker has a starkly unequal relationship with their employer. For workers to exist in the workplace without forfeiting their civil rights, they must be able to bargain on equal footing with their employers—that is, they need to have the ability to organize into unions among themselves. In this sense the movement for securing labor rights is not separate from the movement for securing civil rights—it is a fulfillment of those goals.

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The Biden administration released the president’s budget today—a proposal for tax and spending policies they would like to see become law over the next year. It includes substantial investments in traditional infrastructure, child care and early education, higher education, and elder care. It also calls for recurring cash payments to families with children. It includes money for more generous subsidies through the Affordable Care Act (ACA), substantial increases in Medicare and Medicaid coverage, and calls on Congress to undertake permanent reforms to modernize the nation’s fragmented and inadequate unemployment insurance system.

The proposal also calls on Congress to develop comprehensive legislation to strengthen and extend protections against the abusive practice of misclassifying employees as independent contractors and uses federal housing grants to incentivize inclusionary zoning practices to alleviate the nation’s housing shortage.

On the tax side, it raises taxes on realized capital gains and on corporate income, and it closes loopholes and tightens enforcement in an effort to raise revenue through greater tax compliance.

About 18 months ago, we at EPI released a blueprint for guiding fiscal policymakers. In this blueprint, we identified the main targets of fiscal policy as: ensuring high-pressure labor markets and low unemployment, reducing inequality, and then (and only then) reducing the economic obligations incurred by the public debt.

The Biden administration’s budget (particularly given the passage of the American Rescue Plan earlier this year) scores extremely high on these marks. Specifically:

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Data from large firms filing information on CEO compensation through the end of April show corporations and a strong stock market shielded CEOs from the financial impact of the pandemic.

An examination of the early filings of 281 large firms shows:

• The offer by CEOs to forgo salary increases during the pandemic was largely symbolic. Salaries were stable, but many CEOs pocketed a windfall by cashing in stock options and obtaining vested stock awards, compounding income inequalities laid bare during the past year.
• CEO compensation, including realized stock options and vested stock awards, rose 15.9% from 2019 to 2020 among early reporting firms. Growth in CEO compensation was slightly faster than last year’s strong growth—14.0% between 2018 and 2019—while the annual compensation of the average worker increased just 1.8% in 2020.
• Strong CEO compensation growth and modest growth in worker annual compensation yielded a remarkable growth in the CEO-to-worker compensation ratio, which jumped from 276.2 in 2019 to 307.3 in 2020 among early-reporting firms. In firms that retained the same CEO, the CEO-to-worker compensation ratio rose to 341.6 in 2020, up from 278.9 in 2019.

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