Yesterday’s inflation data for April 2022 was a mixed bag but had some encouraging seeds in it. Measured year-over-year, overall and core inflation (inflation minus the influence of volatile food and energy prices) both ticked down slightly. Measured just over the past month, the overall index decelerated significantly, but the core index rose back up to the level it had plateaued at in the five months before March. This post is about why wage trends—both throughout the inflationary burst and in very recent months—should make us even a bit more encouraged that inflation can be brought back under control without the Federal Reserve having to move interest rates to a radically more contractionary stance. 

There has been a lot of discussion—and confusion—recently about the role of tight labor markets (“the Great Resignation”) in the rise of inflation we’ve seen since early 2021. In this post, we make the following points about the wage/price relationship:

• To date, the rise of inflation has unambiguously not been driven by tight labor markets pushing up wages.
• Nominal wage growth has been fast over the past year relative to the past few decades, but it has lagged far behind inflation, meaning that labor costs are dampening—not amplifying—price pressures. Last week’s jobs report showed that average hourly earnings growth over the last quarter was 4.4% (at an annualized rate), with wage growth actually slowing in the last three months to under 4%.
• If the only change in the economy over the past year had been the acceleration of nominal wage growth relative to the recent past, then inflation would be roughly 2.5–4.5% today, instead of the 8.6% pace it ran through March. In short, nonwage factors are clearly the main drivers of inflation.
• Claims that the Federal Reserve needs to shift into a much more hawkish mode to keep wages from amplifying inflation and to bring inflation back down to more normal levels are often greatly overstated and understate how much damage this strategy could cause.
  • As long as wage growth is dampening inflation (and it is), then the question of how hawkish the Fed must be is not a question of whether inflation will return to more normal levels, but just how quickly we want that happen.
  • A much quicker return to more normal inflation would require sacrificing important gains that stem from low unemployment, even though a return to more normal inflation is quite likely to occur on its own. This makes the cost of a more hawkish stance (more joblessness) high and the benefits (a few months of slightly lower inflation as we get back to normal) pretty low.

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The COVID-19 pandemic showed how critical unemployment insurance (UI) is for sustaining workers and the economy during times of crisis, while also revealing deep fissures and inequities in UI systems. Federal programs that expanded UI eligibility, benefit levels, and benefit duration kept local economies afloat and became a lifeline for millions during the early stages of the pandemic, but the crush of UI claims at peak levels of unemployment also exposed the poor condition of state UI systems. From backlogs and delays caused by insufficient administrative capacity and outdated technology to inadequate benefit amounts, many state UI systems operate in a chronic state of underfunding that results in inequity and dysfunction.

One of the root causes of these problems is rarely discussed: Lawmakers have structured state UI financing in a way that permanently starves the UI system. UI is currently funded through a combination of federal and state taxes paid by employers, where state UI taxes pay for benefits during normal economic times. However, in most states, the amount of employee wages on which employers pay state UI taxes, i.e., the taxable wage base (TWB), is extremely low. At present, 14 states and Washington, D.C. have taxable wage bases below $10,000 and a remarkable 36 states have their bases set below $25,000. This means that in 71% of states, employers pay UI taxes at most on the first $25,000 of an employee’s annual earnings.

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Below, EPI economists offer their initial insights on the jobs report released this morning, which showed 428,000 jobs added in April.

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May 1 is International Workers’ Day, a day workers around the world mark as Labor Day with marches, demonstrations, and renewed calls for workers’ rights. “May Day” got its start in 1886, when U.S. workers rallied in support of ongoing campaigns for an eight-hour day, setting May 1 as a deadline to begin mass strikes if employers failed to adopt shorter hours.

In 1886 Chicago, where tens of thousands joined May Day actions and thousands went on strike, subsequent police shootings of striking workers escalated into the well-known Haymarket Tragedy. Months of state-sanctioned, anti-immigrant repression of labor organizing followed. Police raids of union halls and arrests of organizers culminated in a sham trial, eight guilty verdicts, and public hanging of four prominent immigrant, working-class movement leaders (a fifth died by suicide prior to the execution date). The trial and executions were followed closely by workers across the country and around the world. In memory of the Haymarket Martyrs, labor and socialist organizations declared May Day International Workers’ Day, now an official public holiday in many countries.

Over 100 years later, our May Day 2022 economy has much in common with that of May Day 1886—rising inequality, economic upheavals affecting those with the least financial security, xenophobia, market concentration, and an upsurge in workers taking matters into their own hands while facing intense employer resistance. U.S. factory workers and railroad workers are still campaigning for shorter hours, in some cases striking (or threatening strikes) to challenge inhumane 12-to-14-hour shifts and unpredictable forced overtime. New generations of workers, including many immigrants, are breaking through barriers of employer union-busting to organize unions in warehouses, hospitals, nursing homes, coffee shops, retail stores, media outlets, universities, and beyond.

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“Our health is just as essential,” read the homemade sign Chris Smalls carried in front of the Amazon JFK8 Staten Island warehouse on March 30, 2020, a moment when it had become clear that exposure to coronavirus could be deadly. After a week of appealing to management for masks, gloves, and a temporary shutdown to sanitize exposed areas, several JFK8 workers walked out and called on Amazon to take steps to protect those inside the warehouse where positive cases were known but not always being reported to employees.

This Workers Memorial Day, policymakers should listen to and follow the lead of workers at Amazon and elsewhere who are organizing to build the power necessary to demand safe work, often in the face of long odds and intense employer union-busting. With pandemic losses still mounting and untold numbers of worker deaths to mourn, it’s past time to ensure effective regulation of workplace safety and the protection of all workers’ rights to form a union.

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Measuring wage growth, particularly at high wage levels, has become a difficult task. The most useful, publicly-available data for measuring trends in hourly wages is the Current Population Survey (CPS). Analyses from CPS, for example, (like this one here) are a key reason why we know that except for brief periods of decent wage growth for middle- or low-wage workers between 1979 and today, wage growth for most workers has been slow while wage growth for top earners has been far more rapid.

Unfortunately, it is increasingly difficult to report accurate data on top-end wages or wage changes using the CPS because of growing inequality and measurement issues related to top-coding, an earnings reporting method that hasn’t kept up with rising wages for top earners and thus limits measuring of earnings above a certain threshold (and therefore makes it difficult to accurately measure average wages as well). “Top codes” used in the CPS assign observations that report wages over some threshold the identical “top-coded” value in the data (the current top code is $2,884.61 in weekly wages). The top code is not updated annually for inflation or anything else. Consequently, it suppresses a larger and larger fraction of the CPS data over time. If wage-growth for workers who make more than the top code has been systematically faster than for workers beneath the top code, we will miss out on just how much wage inequality has risen.

This creates a real problem for assessing overall trends in inequality, because so much income (including wage income) has been concentrated at the very top of distributions. For example, data on annual wage growth from the Social Security Administration that is not top coded show substantially more dramatic growth in inequality than what is apparent in CPS data (see an analysis of this SSA data here). Given that the overwhelming majority of high-wage workers work full-time, it is surely the case that the SSA data for the highest-paid workers is mostly representative of very rapid growth in hourly wages, not hours worked. Yet we cannot really validate this with direct measures of hourly wages available to use in the CPS.

Aside from the problems it presents for interpreting overall trends in inequality, the CPS top code has radically different implications for analyses of smaller demographic groups. At the Economic Policy Institute (EPI), we provide labor market and wage analysis on our State of Working America Data Library page based on the best available data. When we attempt to analyze wages among demographic groups, by gender, race/ethnicity, and/or education, the parts of the wage distribution we are able to measure is even smaller because more and more observations’ data are suppressed by the top code.

The failure to adjust the top code to better capture wages at the high end isn’t a new phenomenon. Between 1973 and 1988, the top code for weekly earnings was constant in nominal dollars at $999 per week, even as inflation ran in double-digits over some of the intervening years. Then, it stayed at $1,923 per week between 1989 and 1997. The latest change in the top code was made back in 1998; the current top code has now sat at $2,884.61 per week in nominal value for the last twenty four years. Even if wages did not grow in real terms and only kept up with inflation, the ability to measure high end wages would be compromised. But, in most years, high end wages grew far faster than inflation, increasing the pace at which wages could not be reliably measured.

The Census Bureau has announced upcoming changes to the top-coding procedure for usual weekly earnings and usual hourly earnings data, which will certainly improve data analysis moving forward. But, there has been no indication that data will be changed historically, which does not solve the problem of trying to uncover high end earnings trends over the last few decades.

We start our display of the top-code issue with an examination of the shares of each demographic group that have been top-coded over time. Figure A displays top-coding shares overall as well as by gender from 1979 to 2021. Figure B displays the same for White, Black, Hispanic, and Asian American and Pacific Islander (AAPI) workers. And, Figure C displays the same trends by educational attainment.

Figure A illustrates the difficulties in measuring between and within group inequality at the high end of the wage distribution resulting from a significant portion of men being top-coded. This is particularly noticeable during 1985–1988 and 2018–2021. The share of men who were top-coded increased sharply through the 1980s, exceeding 5% of workers between 1986 and 1988, and then reached an all-time high of 7.7% in 2021. The higher shares of men top-coded compared with women is not surprising given the fact that they are far more likely to be found in higher paying jobs in the U.S. economy while women continue to face a significant gender pay gap, particularly at the middle and upper portion of the wage distribution, even among women with higher levels of educational attainment.

Figure B makes apparent how the historical and current discrimination against Black and Hispanic workers has meant that they are less likely to be in higher paying jobs, thus leading them to have significantly lower shares of top-coded workers than their AAPI and white counterparts. Between 1979 and 1997, the share of Black and Hispanic workers who were top-coded did not exceed 1.6% for either group, while “other” (largely AAPI) workers and white workers’ shares hit 4.8% and 5.1%, respectively. After the top-code threshold was reset in 1998, Black and Hispanic shares remained low until the last couple of years, hitting 2.5% and 2.6%, respectively. At the same time, AAPI and white workers experienced significant increases in the shares of their workforce hitting the top code, 10.9% and 6.8%, respectively. Ultimately, the significant increase in top-code shares among AAPI and white workers makes measuring the true high-end wage inequality within and across racial and ethnic groups nearly impossible; in fact, it also makes calculating average wages more challenging—relying more heavily on imputation assumptions—if the upper end is increasingly top-coded.

Figure C demonstrates how higher levels of educational attainment are related to higher earnings. There is a consistent and significant gap between the top-code share of workers with an advanced or college degree and those with the next highest level of educational attainment (some college experience). In 1988, 20.1% of workers with an advanced degree were top-coded, while the same was true for 11.0% of workers with a college degree. The share of workers with some college experience who were top-coded was only 2.9%. This large gap persisted in 2021, with the top-code shares being 17.0% and 9.3% for workers with an advanced and college degree respectively while workers with some college experience had only 1.9% top-coded. The significant shares of top-coded workers within the advanced degree and college educational attainment groups increases the difficulty of measuring their wages both alone, and in comparison, to other groups.

Of course, the difficulties of measuring high end earnings are even more acute when we look at demographic groups that cut across gender, race/ethnicity, and education.

Figure D makes the power of intersectionality evident. Workers who identify with the groups with the largest top-code shares across gender, race, and education have earnings which are by far the most difficult to measure. Men (7.7%), AAPI workers (10.9%), and those with advanced degrees (17.0%) have the largest top-code shares of their respective demographic groups. However, when you examine these demographics in combination, AAPI men with advanced degrees, the share of workers who are top-coded is even more significant (29.2%). The group with the second largest top-code shares across all combinations of gender, race, and education are white men with advanced degrees (25.6%). For these groups, and all those displayed in Figure D, high-end earnings are exceedingly difficult to measure due to large top-code shares.

See our State of Working America Data Library page for wages by percentile, including NA’s for percentile values that can’t be reliably measured.

It’s unfortunate that policy has not made a significant contribution to reining in rising wage inequality over these years. But allowing rising inequality to mechanically obscure even its own measurement seems truly absurd, and yet extremely easy to fix. The BLS should commit to higher and far more regularly updated top codes, or find some other way to allow researchers to get a clearer sense of what is happening to wage inequality than what the CPS currently allows.

The inflation spike of 2021 and 2022 has presented real policy challenges. In order to better understand this policy debate, it is imperative to look at prices and how they are being affected.

The price of just about everything in the U.S. economy can be broken down into the three main components of cost. These include labor costs, nonlabor inputs, and the “mark-up” of profits over the first two components. Good data on these separate cost components exist for the nonfinancial corporate (NFC) sector—those companies that produce goods and services—of the economy, which makes up roughly 75% of the entire private sector.

Since the trough of the COVID-19 recession in the second quarter of 2020, overall prices in the NFC sector have risen at an annualized rate of 6.1%—a pronounced acceleration over the 1.8% price growth that characterized the pre-pandemic business cycle of 2007–2019. Strikingly, over half of this increase (53.9%) can be attributed to fatter profit margins, with labor costs contributing less than 8% of this increase. This is not normal. From 1979 to 2019, profits only contributed about 11% to price growth and labor costs over 60%, as shown in Figure A below. Nonlabor inputs—a decent indicator for supply-chain snarls—are also driving up prices more than usual in the current economic recovery.

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Inflation is by far the biggest economic concern facing the U.S. economy today. While job growth is historically rapid and survey evidence indicates that workers think now is the best time in years to find a good job, the inflation surge has kept this labor market strength from translating into higher wages and incomes for most households. The most well-known tool to restrain inflation—higher interest rates engineered by the Federal Reserve—is potentially very costly if it leads to higher unemployment and a weaker labor market.

Given all of this, policymakers should look for any tool that can help restrain inflationary pressures without causing significant collateral damage. One such tool could be investments in child care and elder care. By subsidizing families’ use of child care and elder care and providing direct investments to providers, such investments could boost future labor supply by allowing working-age parents and children who want to look for paid employment to do so while remaining confident their family members are receiving care. Further, these investments can help dampen inflationary pressures—that rising wages could in theory contribute to—even well before they fully take effect.  

To understand why, one must realize that developments in the labor market will likely determine just how easily (or not) inflationary pressures can be lowered in the next year or so. The inflationary spike that began in 2021 didn’t start in the labor market—it started in commodities and in supply-chain-snarled durable goods sectors where wage growth was actually slower than in other parts of the economy. But going forward, whether or not the Federal Reserve needs to start applying ever-stronger medicine (with deeply damaging side effects) to slow inflation depends on what happens in labor markets. Specifically, it depends on whether or not the initial inflationary shock leads to unsustainably large wage increases that push up inflation even further, leading to wage-price spirals of the sort that characterized the 1970s.

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Below, EPI economists offer their initial insights on the jobs report released this morning, which showed 431,000 jobs added in March.

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This is an excerpt from an op-ed in Jacobin. Read the full op-ed here.

Every April 1, the government decides, via lottery of all methods, which employers will get new visas for the H-1B, a temporary work program that has inflicted serious harm on millions of workers over the past three decades.

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Recent cases brought by state and local enforcers include the recovery of $130,000 for New York City building superintendents, who were paid no wages at all, and a recovery of nearly $220,000 for workers in a Seattle specialty bar and grocery store based on minimum wage and paid sick leave violations. In addition, prosecutors on both sides of the country took action against contractors in the construction industry: The King County (WA) prosecuting attorney concluded a case in which a worker was killed in a preventable trench collapse, while the Manhattan district attorney indicted several interior construction companies and their owners for a conspiracy to evade more than $1.7 million in workers’ compensation premiums.

Here’s a snapshot of some enforcement actions in February and March 2022.

The New York Attorney General (AG) announced the settlement and recovery of $130,000 in a case involving building employers that failed to pay live-in superintendents any wages at all, and compensated them only through providing lodging (which was needed to perform the job).

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With approximately 600,000 workers, the H-1B is the largest temporary work visa program in the United States—an important program that allows U.S. employers to hire college-educated migrant workers. However, the H-1B program is not operating as intended and needs to be fixed. Instead of being used to fill genuine labor shortages in skilled occupations without negatively impacting U.S. labor standards, the latest data show that the H-1B’s biggest users are companies that have an outsourcing business model that exploits the program by underpaying skilled migrant workers. President Biden can and should implement regulations that would prevent such exploitation.

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The COVID-19 pandemic presented a massive crisis that demanded a large collective response. At times, strong government action—mask mandates, expanded unemployment insurance, stimulus checks, free vaccines—saved lives and livelihoods. At the same time, past underinvestment in public services exacerbated suffering as hospitals were overwhelmed, unemployment claims processing stalled, and schools struggled to adjust to remote learning. Now, thanks to federal recovery funds administered through the American Rescue Plan Act (ARPA) in 2021, state and local policymakers have substantial additional resources to invest in their communities, whether that means preparing for the next unexpected disaster or strengthening the services that help individuals and families through their own difficult times.

Investing in these services also means investing in the workers who carry them out, far too many of whom are paid low wages for their valuable work in providing public education, delivering health services and pandemic response, administering programs such as unemployment insurance, keeping our roads and sewers safe, and getting commuters to work. This blog post presents data quantifying and describing these public-sector workers and shows that Black and Latinx employees are especially likely to be paid inadequate wages.

The U.S. Department of the Treasury is encouraging states and localities to use federal recovery funds with equity in mind. To advance this goal, states and localities should invest in improving pay for their own employees who ensure social needs are met, especially lower-paid state and local employees, many of whom are women of color.

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March 11 marks the one-year anniversary of the signing of the American Rescue Plan Act (ARPA). This $1.9 trillion dollar relief package was both an emergency measure to help the nation through the worst pandemic in a century and an ambitious catalyst to jump-start efforts to redress the staggering economic inequalities in our economy. In its first year, ARPA helped the economy recover at a tremendous pace and aided working families through difficult times. In the year to come, state and local policymakers will have critical opportunities to use their substantial remaining ARPA funds to rebuild the public sector, support low-wage workers, and target systemic inequities.

ARPA supported a year of strong growth

A full labor market recovery took more than a decade after the Great Recession began in late 2007. Federal stimulus, needed to restart the economy in times of recession, was inadequate to circumstances throughout the 2010s. The slow recovery of the economy during the Great Recession also gave ammunition to political forces that supported austerity, the dismantling of labor unions, and the continued weakening of the social safety net.

With inadequate federal fiscal aid, many states faced large budget shortfalls in the wake of the Great Recession, and many state and local lawmakers responded by dramatically slashing budgets and cutting jobs. These cuts to state and local government had a disproportionate impact on women and Black and Hispanic workers, who are more likely to be employed in the public sector. This austerity was not only unnecessary, it also directly contributed to the slow pace of the economic recovery.

This long period of anemic growth also meant a lost decade of potential wage growth for low-income and middle-income workers, and racial employment and wage gaps continued to expand.

Along with COVID-related legislation like the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in 2020, ARPA has gone a long way to making sure the mistakes of the Great Recession were not repeated. Tens of millions were kept out of poverty because of social insurance programs from CARES, ARPA, and other relief legislation. Despite a catastrophic cratering of the economy in March 2020—with more than 20 million jobs lost—the country is on track to return to pre-COVID levels of employment before the end of 2022 (Figure A).

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March 15 is Equal Pay Day, a reminder that there is still a significant pay gap between men and women in our country. The date represents how far into 2022 women would have to work to be paid the same amount that men were paid in 2021. Women were paid 22.1% less on average than men in 2021, after controlling for race and ethnicity, education, age, and geographic division.

What’s particularly troubling is there has been little progress in closing the gender wage gap over much of the last three decades, as shown in the figure below. The regression-adjusted pay gap narrowed between 1979 and 1994—falling from a 37.7% pay penalty to a 23.2% pay penalty. But the entirety of the narrowing gap between 1979 and 1994 can be attributed to men’s stagnant wages, not a tremendous increase in women’s wages. Since then, the gap between men’s and women’s pay has narrowed hardly at all. In 2021, the pay gap remained at 22.1%.

Over this period of pay gap stagnation, women have consistently increased their investments in education to increase their pay. Back in 1994, as progress toward closing the gender wage gap stalled, men were more likely to have a college or advanced degree than women. A quarter of men (25.1%) had at least a four-year college degree compared with 23.8% of women. By 2021, women’s educational attainment had surpassed men’s educational attainment. In 2021, 37.4% of men and 43.8% of women had at least a college degree. Unfortunately, even with these advances in educational attainment, women still face a stark pay gap. Women with advanced degrees are paid less, on average, than men with bachelor’s degrees.

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Below, EPI economists offer their initial insights on the jobs report released this morning. The report showed a strong 678,000 jobs added in February, for a total of 7.9 million jobs added since the end of 2020.

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This is an excerpt from an op-ed in CNN Business. Read the full op-ed here.

When the coronavirus pandemic shut down businesses in spring 2020, the labor market lost 22 million jobs in just two months—more than twice as many jobs lost during the entire Great Recession and financial crisis of 2008–2009. Given that a full labor market recovery from the Great Recession took a decade, there were sincere worries that Covid-19’s economic wound could take even longer to heal. But because we undertook a radically different—and better—policy response to the latest crisis, the labor market is far healthier today than anybody expected it would be in those grim early days of the pandemic.

Over the last 12 months, the economy has added 6.6 million jobs, an astonishing pace. And while there is still a significant gap in the labor market, we are on track to return to pre-pandemic labor market conditions before the end of 2022—a recovery that is roughly eight years faster than the recovery from the Great Recession, as shown in the figure below.

The National Labor Relations Board (NLRB) enforces the National Labor Relations Act (NLRA), the nation’s fundamental labor law that guarantees most private-sector workers the right to organize and the right to collective bargaining. Years of static funding has undermined the Board’s ability to fulfill its statutory mission, to the detriment of workers and the economy. The chronic under-resourcing of the Board has created challenges in its enforcement capacity amid the surge of union interest—and unfair labor practices. As Congress debates upcoming budget and spending legislation, it is critical that lawmakers boost NLRB funding to protect workers’ well-being.

NLRB funding has remained flat

The Board’s staffing level has not kept up with the growth in the national private-sector workforce. The number of full-time employees at the NLRB dropped by nearly 31% from 1,789 to 1,320 between 2006 and 2019. During the same period, the number of covered workers per NLRB staff increased by 50%, from one full-time employee per 74,809 workers to one full-time employee per 112,201 workers, as shown in the figure below. Further, staffing levels at regional offices, which typically handle the intake of complaints filed by workers, dropped by 33% between 2010 and 2019.

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Recent cases brought by state and local enforcers include the recovery of $2 million for workers of a Seattle Domino’s franchisee that underpaid workers and didn’t give required notice of schedules; citation of Massachusetts Family Dollar stores for $1.5 million for thousands of meal break violations; and prosecution of several cases involving egregious violations of wage payment, unemployment insurance, and workers’ compensation laws.

Here’s a snapshot of some enforcement actions in early 2022.

The Seattle Office of Labor Standards obtained a $2 million settlement with a Domino’s franchisee that violated fair workweek, minimum wage, and overtime laws. The employer, with 14 locations in Seattle and more than 30 through the Puget Sound area, allegedly violated the city’s Secure Scheduling Ordinance, which requires large retail and food service employers to provide workers with their schedules at least 14 days in advance and provide workers with good-faith estimates of their work schedules, among other requirements. Domino’s also allegedly paid below Seattle’s minimum wage for all time worked in Seattle, and didn’t pay overtime when workers were assigned to multiple locations for over 40 hours per week. The Seattle Office of Labor Standards also reached a settlement for more than $250,000 with a national traffic control company that paid below the city’s minimum wage, among other violations.Read more

The U.S. goods trade deficit reached a record $1.09 trillion in 2021—an increase of $168.7 billion (18.3%) from the 2020 trade deficit—according to new U.S. Census Bureau data. The broader goods and services deficit reached $859.1 billion in 2021, an increase of $182.5 billion (27.0%). These records were driven by a $576.5 billion increase in goods and services imports, including a $501.8 billion increase in goods imports.

The surge in the U.S. goods trade deficit extends a surge in offshoring that has eliminated more than 5 million manufacturing jobs and nearly 70,000 factories since 1998, with overlooked costs for Black workers and other workers of color, as we describe in this new EPI report.

While both imports and exports were depressed in 2020 due to the COVID recession, U.S. trade deficits increased sharply in both 2020 and 2021, as shown in the figure below. This is because the United States was unable to produce the goods needed to respond to the pandemic and to meet increased domestic demand for consumer goods.

However, contrary to popular opinion, the growth in U.S. imports was not just caused by increased domestic goods consumption coming out of the 2020 COVID recession. Imports explained more than 60% of the growth in U.S. goods consumption in 2021, and U.S. goods imports increased faster (21.3%) than domestic goods consumption (17.8%).

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If you’re following debates over inflation, you’ve probably read contradictory things in recent weeks about the relationship between it and whether it is workers (labor) or their bosses (capital) who will be able to protect their incomes from rising prices.

For example, some well-known economists have mocked the idea that inflation is related to corporate profiteering. Yet some of the world’s most influential policymakers have expressed concern that inflation could spark an outbreak of excessive wage growth. One of these policymakers essentially pled with workers to moderate their wage demands in coming months in the name of slowing inflation. Finally, a Nobel Prize-winning economist claimed not only that inflation has nothing to do with the distributional conflict between labor and capital, but that even raising the specter of this will make it harder for policymakers to tamp inflation back down.

So what is the real story about profits, wages, and inflation? Simply put, while changes in the relative bargaining power of labor versus capital are not the root cause of the inflationary shock in 2021, this relative bargaining power will crucially determine whether or not inflation sustains momentum throughout 2022 and requires more sharply contractionary macroeconomic policy to slow.

In turn, policy efforts (like, for example, transformative reform to labor law or ramping up anti-trust enforcement) to change the relative bargaining position of labor vis-à-vis capital would be highly desirable for lots of reasons—but they wouldn’t take effect quickly enough to be relevant to the current inflationary episode. Jawboning from policymakers is unlikely to stop any incipient wage-price spiral—but jawboning only workers and not capital owners to stand down in the distributive conflict is particularly perverse.

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President Biden recently signed an executive order (EO) requiring project labor agreements on federal construction projects over $35 million, a move that is expected to affect $262 billion in federal construction contracting and improve job quality for nearly 200,000 workers.

Project labor agreements (PLAs) are used primarily in the construction industry to establish the terms of employment for all workers on a project. Generally, PLAs specify workers’ wages and fringe benefits and may include provisions requiring contractors to hire workers through union hiring halls, otherwise establish a unionized workforce, or develop procedures for resolving employment disputes. PLAs often include language that prevents workers from striking during the project while also preventing employers from locking workers out.

PLAs are effective mechanisms for controlling construction costs, ensuring efficient completion of projects, and establishing fair wages and benefits for all workers. PLAs also help ensure worker health and safety protections while providing a unique opportunity for workforce development. These agreements can be written to engage local populations, provide jobs for underrepresented groups, and develop experience for apprentices.

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As the inflation debate continues, it’s worth reiterating some important points that policymakers should keep in mind in coming months as they ponder what to do about inflation that emerged last year.

• The argument that too-generous fiscal relief and recovery efforts played a large role in the 2021 acceleration of inflation by overheating the economy is weak, even after accounting for rapid growth in the last quarter of 2021.
• The COVID-19 pandemic is the primary factor driving excessive inflation through demand and supply-side distortions. Going forward, the economic distortions imposed by COVID-19 are highly likely to become less extreme in 2022, providing relief on inflation.
• The worry that inflation “expectations” among workers, households, and businesses will become embedded and keep inflation high is misplaced. What matters more than “expectations” of higher inflation is the leverage workers and firms have to protect their incomes from inflation. For decades this leverage has been entirely one-sided, with workers having very little ability to protect wages against price pressures. This one-sided leverage will stem upward pressure on wages in coming months and this will dampen inflation.
• Moderate interest rate hikes will not slow inflation by themselves. The benefit of these hikes in convincing households and businesses that inflation is taken seriously by policymakers needs to be weighed against their possible downsides in slowing growth.

Inflation in 2021 was not driven by generalized macroeconomic overheating

Dean Baker recently authored a strong post surveying the evidence about inflation and macroeconomic overheating. I’ll just add one or two points to his argument. In the last quarter of 2021, rapid growth in gross domestic product (GDP) pushed it 3.1% above the level it had reached in the last quarter of 2019 (the last quarter unaffected by COVID-19).

Should this level of GDP have put severe stress on the economy’s ability to produce it without inflation? Not really—inflation was low (and falling) in 2019. The economy’s supply side has been damaged since 2019, but it’s easy to overstate this damage. While employment was down 1.8% in the last quarter of 2021 relative to 2019, total hours worked in the economy is only down 0.7% (and Baker notes in his post that including growth in self-employed hours would reduce this to 0.4%). While some of this is due to people working longer hours than they did pre-pandemic, most of it is due to the fact that the jobs that have yet to return following the COVID-19 shock are much lower-hour jobs than average. Since labor is only about 60% of the inputs into production, the 0.4% decline in economy-side hours would only generate about a 0.2% decline in output, all else equal.

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Below, EPI economists offer their initial insights on the jobs report released this morning. The report showed an increase of 467,000 jobs in January—far exceeding expectations. 

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