> Starving your workers to death is not a good long term strategy.
It is when you have an unlimited supply of workers with zero protections. The breaking of the social contract makes all the old rules no longer apply. They will drive us to the absolute edge of torches and pitchforks and keep us there, forever. They will come up with newer and better ways of determining where that line is, and just how far they can push it. And we will sit here like obedient dogs and take it.
I had a grocery store clerk eyeballing my checkout yesterday with absolute amazement at the "luxury" of buying TWO boxes of name brand cream cheese. We live in two completely seperate worlds at this point, and I don't think you have any idea how bad things have gotten for the bottom 90% in this country earning <$100k.
It's not just US - there is a very interesting article in the British Guardian on this very topic at the moment, how people on £60k-100k are still struggling, even though this was always traditionally a very decent pay, nothing super fancy but definitely a nice middle class income that would let you pay off your house, have a modest car and go on holidays once a year. Now everything has exploded in price so much that people earning £70k get nearly nothing left at the end of the month after paying their mortgage/rent, bills, childcare, plus some money for fuel to just get to work. I understand that they are all "privileged" in the sense that they can still afford all of those things while many people in this country can't, but the margins are getting thinner and thinner. People can't save up, they can't buy new stuff(which hurts the economy even further), they spend less money on their kids.....it's not great.
Like, me and my wife have a very decent combined income of over 100k, but even then - 10 years ago I would have thought that with that kind of money we'd be living like kings, but in reality it just lets us save some money at the end of the month and not a whole lot else. If we actually wanted to move up from our 900sqf house or get a slightly newer car, it would eat up into all of that quickly. I think we've reached a point now where I literally don't understand who in this country is buying all these new cars and goes on holidays twice a year(forget expensive ones - I mean a few days in Spain with a budget agency). And I definitely don't understand how a teacher on £27k a year(or a nurse) is expected to make ends meet. It feels like an erosion of society from the very core, where unless you are in the top 1% you just aren't even playing the same game.
As a single 25 year old (UK), I don't save much, I don't have a car, I have rent but no mortgage, no dependants. I don't feel very rich, but I do go on two holidays a year. Though does it even count if I crash on people's floors or stay in a hostel? The idea of staying in a hotel is insane to me, which probably says a lot.
I feel like I am the only person in my friendship group who can afford things like a decent place to live and good quality groceries. This is all from me working hard to move into Software engineering from a languages and humanities degree. Honestly feel that the system is severely broken if the only way to afford a decent quality of life is to get into one of the most lucrative professions out there. Most of the people in my job have been screwed over by the market and have way more rent than me as well, so are probably not even able to do the things I can.
I feel a lot of pressure to get into FAANG or something in order to hope to ever get a house in my lifetime. Especially since my landlord threatened to put up my rent by like £400 the other day and my boss told me my raises will never keep up with inflation. But I'm a humanities person. I don't see myself becoming some sort of 10x engineer without it making me miserable. So, since the absolutely fucked announcements from my landlord and boss, I'm thinking of any way to leave this economic shithole of a country.
I was in the same position as you when I was 25. But I was very hopeful about the future. You don’t need to be in FAANG to do very well for yourself. It worked out well financially.
Yeah i was really enjoying working at this company and making progress at my pace, as a smart person but a non-engineering-wizz. I was feeling optimistic and letting go of the pressure to get into at top tech company. This was allowing me to put in my best at work (which was making me improve a lot), and give myself permission to fully enjoy my arts and humanities hobbies outside of work rather than constantly guilting myself into using all my time to catch up to STEM people. But now they have told me my raises will never keep up with inflation, I feel like I have to do better and spend all my evenings trying to learn everything as quickly as possible with no patience. How did you deal with this?
Well first of all I’d say that your goal shouldn’t be to stay in the same role, even if it was keeping pace with inflation (in future it likely will anyway, when inflation returns to normal levels). By evolving or changing your role you can double or triple your income over 5-10 years. I remember my first two full years with a decent job I got 20% raises, then was disappointed to get 2% the third year, boss told me I should expect that from now on. So that would mean 35 years to double my then salary… in reality, I changed role and more than doubled it within a year.
If you’re 25, you might as well spend your evenings trying to upskill. Make time for important things, but trim unnecessary leisure and invest in your skills/expertise/network. It’s much harder to do this when older.
Personally I continued to improve my technical skills, especially in getting into new areas like AI, while also building considerable domain knowledge, and taking on management responsibilities. You don’t really have to compete directly with yon 10x STEM rockstars - go for breadth, not proficiency. Someone who understands a lot of areas fairly well, and can communicate and document well, is incredibly useful to an organisation.
Did you have to brush up on maths to get into AI properly? Theres a short course at a STEM university in AI that an old colleague of mine did. I kept considering it, but it says it requires strong maths skills. I dropped out of maths at 17. I don't think I'm so stupid I couldn't get past a 17yo level of maths, but I do think that I'm severely behind and it would take a lot to make up for that.
I didn’t have much formal maths beyond 17, just a year of university statistics. I think it paid to spend some time studying linear algebra and statistics (reading Taleb’s books helped make it a more interesting journey), learning to read mathematical notation, and just getting kind of comfortable with the field so that you know when to ask an expert, but you don’t need to go very deep. Most AI professionals probably spend most of their time on data wrangling and engineering, not using any advanced maths. And then in order for their teams to achieve anything useful they need to work with “business” people who have domain knowledge. Also most ML algorithms I’d say can be grasped conceptually without being a big maths person, and then you have a sense of where to apply them. But over the years, you’ll pick up a lot of stuff anyway. Plus, with modern LLMs, it’s anybody’s game frankly.
There might be some really tough maths on that course, but I’d argue it’s not exactly necessary. There’s undoubtedly a lot of people doing high paying “AI” related jobs whose main qualification is being able to identify a use case and coordinate a project staffed by engineers and data scientists.
Thanks for answering my questions. Could you explain what you mean by Taleb's books. I don't know who that is and what books you are referring to. I tried to google Taleb but there are a lot of people called that.
Nicholas Nassim Taleb, author of Anti-Fragile and The Black Swan. I recommend those ones. He writes about the role of uncertainty in life. Certainly less dry than a statistics handbook, and drives home a lot of important concepts.
Hyperbole is often (successfully) used as a literary device to express sentiments. Is there a sentiment expressed in the parent comment you don’t agree with? Then let’s talk about that instead of the form of the argument.
Once again, it’s a literary device; you’re doing the same thing when you call it “doomsaying”. The goal of it is to evoke a certain emotion out of the reader, which is fine in a discussion. Otherwise any conversation would be dry as a doctor’s report for gastric issues.
I prefer arguing about reality rather than people’s sentiments. The poster’s argument is useless because of the obviously false assumption of “unlimited workers”, which means the hyperbole did nothing (and actually derailed the conversation and wasted time). Basically what the talking heads on tv “news” channels do to get people to rage and then we end up having measles outbreaks because someone had the sentiment that vaccines are harmful.
The bourgois, whom would have to fight among themselves to determine who will dominate, and who will be dominated.
Or they would have to resort do massive immigration, destroying culturally their own country in the process, and laying the path to being replaced in the long run.
Thanks for the new opportunity to flag your comment.If you sincerely think that not wanting kid is a death cult tactic... Well I don't even have to say it. I LL just let people make their own opinion of you.
Your comment is greyed out, but this is a genuinely good question.
I live in a country where homes for the elderly (and the health system at large) have managed to remain profitable while overpaying doctors and severely underpaying just about anyone else. Now we're two months into a failing doctors' strike (because the doctors feel like they can extort an even higher wage from the state) and we're on the way to sign a memorandum for easier worker immigration from Phillipines because we need nursing and medical assistance staff and the (heavily subsidized and mostly state-ran) healthcare institutions can't by law pay native staff a fair wage.
What I can gather from that so far is that it sucks when you're being fucked over by a free market economy because some venture capitalist is being a miser, but it's 10 times worse when the miser is a legitimately legislated government. Immigration is not just a xenophobia issue, it's a genuine concern when an entity realizes it doesn't need to spend as much and starts mass importing cheap manpower from the other side of the globe.
It seems like the worst thing about free markets are changes that make them unfree or coercive beyond the baseline coercion inherit in being alive. Free markets are just the state of nature and improving on nature is difficult right?
I am not so positive about your view here, I was saying that free markets can be bad, but when a government acts as a free-market entity like a corporation, it gets even worse, because you can't bet against it and economically influence it the same way you can a corporation. That's not a statement against market regulation, it's a statement against goverments getting too many economists and too little humanitarians to run themselves and trying to maximize economic markers instead of the citizens' welfare.
When governments get involved in free markets - isn't the thing that makes this situation worse that the market becomes even less free? I can't understand your reasoning here yet.
I'm in total support of you not having children "to starve the bourgeoisie". I want to do all that I can to help you remain true to this strategy as long as you feel this way!
Yes and just look at history. This has been the way most people live and have lived. As peasants, toiling for landowners in exchange for survival. It is a good long term strategy in that it has been the norm throughout history. The occasional violent uprisings are a cost of doing business.
But in the short term it pays dividends, bonuses, and raises. It's kind of a tragedy of the commons type problem, none of the leadership and investors care about the long term (the negative effects on the corporation or society) as long as individually they succeed.
So many of us know about Goodhart’s law but willfully ignorant about how that applies to modern economies. We made money to be the metric we judge things by, and now we get to enjoy or suffer the results of overoptimization on that metric.
> The idea of bringing down wages to tame inflation is rooted in the theory that if we reduce the costs of labor in the production process, firms won’t have to increase prices as much, and thus the rate of inflation would fall.
The root cause IMHO is that especially in the US there is barely any competition any more. No matter where you look, it's at most five to six different (multi)national megacorporations... and so they can extract many billions of dollars from the economy every month. Enshittification, just on macroeconomic scale.
Can you imagine a situation where the cost of labor suddenly came down and then the managers of a company telling the investors, "hey, looks like the cost of labor went down, which means the cost of all of our inputs went down, so I am just going to lower prices even though we already know the wtp price point, and you are going to get less profits!". Those managers would be fired that day, and replaced.
If there's one thing I learned studying economics, it's that the layperson's gut intuition about how something works from a macroeconomic perspective is usually not only wrong, but pretty close to the opposite of how things actually work.
When I think about falling trust in so called “mainstream” media, pieces like these come to mind. Used to be that newspapers were the fourth estate, existing independently and keeping powers in check by being a source of transparency. Now in the age of web driven advertisement that business model doesn’t work anymore, and what we get is the shells of the old behemoths used as corporate mouthpieces and the crumbling democracy and freedom that entails. What an absolute shame.
Cable has always been ad-funded as far as I can tell.
Big print newspapers were mostly independent and subscriber-funded, so they answered to their subs rather than advertisers.
The Economist is still independent and subscriber-funded. But, most sub-driven publications now have to fight tooth and nail to stay above water, so the writing needs to be tailored towards engagement/clicks :/
At the local level newspapers weren’t beholden to business interests to the extent they are now since there were much fewer ways to advertise to potential customers. At the national level there was sufficient competition in media ownership to allow for real investigative reporting. Now that media has consolidated they don’t have to try as hard to attract viewers/readers. Also consolidation in the corporate world means exposing wrongdoing in one brand means pissing off that brand’s owner who also owns many other brands. In the past exposing shenanigans in a cereal brand didn’t mean that you lost out on advertising from a whole slew non related food brands.
There was also more a desire to serve public interests prior to Reagan getting rid of the rules on media consolidation. It wasn’t perfect but it was much better than what we have now. News media is much more beholden to corporate interests now than in the past.
The period during which the majority of mainstream news was a venerable “fourth estate” must have been for an exceedingly brief period of time. Generally the news has always been owned / controlled by wealthy and powerful interests.
What's changed is public consumption/access to news about local issues.
Pretty much every local newspaper has been bought up and now almost exclusively talks about ads... err.. I mean national issues. And it isn't even articles that these papers write, rather just the same article published by someone like The McClatchy Company.
You’ve pointed out one instance of this occurring in the past. This doesn’t dispel the essence of the point you are responding to. You need to show that it was widespread and occurred in most media outlets.
> Used to be that newspapers were the fourth estate
This has never (really) been the case with "mainstream" media. "The media" in common parlance is a farce. Historical news has almost always been agenda driven, and was key to the American revolution, Labor reforms in the US, etc. Those things are not "mainstream media."
I wanted to know how my income history has been keeping up with inflation and I couldn't find an easy way to do it. I made https://askforapayraise.com/ to help visualize how much you are keeping ahead of inflation or falling behind.
Would you consider adding features for countries/currencies outside of the US/dollar? And/or do you have a github repo that I could PR against to add it if you'd prefer.
Could be an additional benefit to provide a tool-interface to educate people that [manufactured] inflation helps large companies with their debt - because their amount of $ debt owed doesn't change, yet if they generate revenues - they are now generating more $ to pay off their debt faster; this will work slightly different between governments-states amassing debt vs. companies that have debt.
this whole morning i tried entering the data from oldest date to newest date and it kept crashing but if you start with your newest data points and work backwards it should work.
I'd love to see more analytical humility in this area.
> "The problem – economics research has repeatedly shown that this is not the case."
And economics research has also repeatedly shown that this IS the case. I'm not supporting that argument, I'm just saying that you have conflicting bodies of research. Everyone here is engaging in motivated reasoning, depending on who they think the boogie-man is.
Humility means being clear about how much you can possibly say from the evidence at hand. Humility means thinking more about confounding factors than about things that you believe to be true.
I'd also love if we talked more about access to resources instead of money.
Do you know of research that disagrees with this post? The Economist article doesn't mention any, in fact there is only a single sentence supporting its headline: "Although American pay growth has subsided from more than 5.5% year on year to around 4.5%, that is probably still too high for the Federal Reserve’s 2% inflation target." It seems like an editor may have chosen a headline that doesn't match what the article says.
I'm familiar with this stereotype, but again, do you know of any such research in this case? I'm not an economist but I can't immediately find any, even if I add stuff like "conservative think tank" to my search terms.
But the blog article says: "The Economist piece appears to have repeated the old theory that wage growth causes inflation spirals. As discussed, empirical evidence shows this is not true"
I don't think many economists would argue that wage inflation causes no price inflation, and that also doesn't seem to be the finding of the paper they are referring to - which finds that wages CAN create inflation. The debate is about the amount of passthrough (e.g. how much an increase in wages affects an increase in the price of goods).
Then the blog article says:
> there is evidence that it is elevated inflation that causes wage increases.
But that can be true while the opposite is also true. Inflation can cause wage increases. Wage increases can increase costs. Increasing costs can lead to price increases. Price increases cause inflation. Inflation can cause wage increases. Each step in diminishing quantities, but still multiplying the initial effect of inflation.
I think this article is very cherry-picky of the facts.
Hi! Author here. This was actually my second article on wages and inflation (the first one can be found on my site - Dec 4, 2022 - Wages and Inflation). The main theoretical work behind this actually work done by Oliver Blanchard (1985). From that post:
"Another influential paper was Blanchard (1985). In this paper, Blanchard argued that in a setting where an increase in overall demand reduces unemployment, firms will have to compete for workers by offering higher wages, which will force them to increase their desired mark-up, pushing up prices of goods. With higher prices of goods, real wages of workers (i.e. the actual amount of goods workers can buy) fall, thus pushing them to demand higher wages. In a staggered negotiation situation, where these negotiations happen repeatedly (i.e. month-to-month) rather than in a world where wages and prices adjust immediately, inflation can persist for a long time.
Due to the simplicity and logical appeal of this theory, it has been heavily tested empirically. Most empirical studies to date suggest, however, that wages do not cause1 inflation. Schwerzer and Hess (2000) from the Cleveland Federal Reserve did an overview of the economic research at the time and found very little evidence supporting the idea that wages cause inflation. Only one study showed a causal impact2, while three others, and Schwerzer’s and Hess’ own work were not able to find this causality. The reason for the ambiguity in results is because inflation and wages move so closely together that attempting to separate and isolate which one causes which is not straightforward to do. Their own work focused solely on establishing the direction of causality, using what is called in economics and statistics “Granger causality”, which is a test whether the future values of one time series3 (inflation in our case) can be predicted by past values of another time series (nominal wage growth) and vice-versa. The review and analysis conducted by Schwerzer and Hess suggests that increasing wages do not cause inflation. On the contrary, evidence likely points to inflation driving increased wages."
So I would say so far the preponderance of evidence suggests there is unlikely to be causality of wage growth on inflation. Multiple methods have shown the causal link is unlikely.
However, it is true that if wages didn't rise (that is workers would take real pay cuts) then inflation would fall, which is the main channel central bank interest rate hikes work to reduce inflation.
What is more important in the current inflationary surge, is that the behavior of wages is entirely consistent with previous similar historic inflationary episodes. If anything, they're actually a bit lower than in the past. The focus on wage growth as a concern is not warranted at these levels.
> If costs go up, companies must raise prices to maintain normal profitability.
That is only true if salaries make up a significant amount of production.
My favorite example was a job at a cookie factory. A hall full of giant machines, multiple production lines. Mine, counting 5 humans produced FIVE HUNDRED THOUSAND boxes of cookies per day that cost 99 cent in the store. In a 5 hour shift I earned 35 euro.
5 X 35 = 175
500000/175 = 2857 euro for each 1 euro worth of salaries
IOW salaries make up 0.035% of what customers pay.
Would the cashier or the truck driver be earning 100 k per day? The 30 ish people in the office? Would they get 100k for "running" multiple production lines?
It is frankly insulting we pay people to talk economic rubbish like that. The giant building, the ovens & production lines, the trucks and the ingredients must be handed down by the gods for free?
In my current job I clean trains for ohh something between 5000 and 20 000 people per day. Assuming a 20 k day each traveler pays me 0.0075 euro while a ticket costs [say] 50 on average. THREE out of TWENTY THOUSAND pay for my labor.
They need multiple people to clean and drive the train of course. It quickly adds up to.... nowhere near a million euro.
Building a train, train stations and laying track involves a lot of people but it isn't that (to put it scientifically) the workers are pulling the rails out of their ass or are hammering out the components on an anvil. It involves a ton of equipment.
So they put down tracks 50 years ago using machines build 60 years ago in factories build 70 years ago using tools made 80 years ago in factories build 120 years ago. etc
Lots of labor, it took very few economists. They sit in the train, eating cookies, complaining about how expensive the ticket is. One says it must be labor, they are still talking about this to this very day and will continue to do so until the end of time.
That's true at a microeconomic level (i.e. single company), but at the macroeconomic level we are talking about aggregate wages as a percentage of all company costs.
As an aside, I think you might be underestimating the percentage of costs that staffing take - Take your example of train operations.
The report below shows that Staffing Costs are approx. 28% of a train operators costs within the UK (NB: this would not include costs maintaining the rails).
In your job with the cookie factory, you are also underestimating the amount of labour - I assume there were office staff, people who transported the cookies, people who made the raw ingredients, shopkeepers who put it on the shelf, all of whom have to be paid for within the ultimate retail cost. At that scale of production you will also require technical managers, maintenance engineers, marketing teams, QAs...
Long long ago there was a bakery, the owner baked cookies and sold them. People were able to buy the cookies. He made a living doing that. We've somewhat upgraded the process from there.
We went from factories full of people producing many cookies to halls full of machines. We went from really expensive custom machines to unbelievably cheap ones.
The maintenance engineer works many lines, he has to do some work when something breaks but between those repairs tens of millions of cookies are produced. The designer does his job every 1-2 billion boxes of cookies but only if it is a custom job. If it is a generic machine it will be many billions more. He costs 20-30 boxes of cookies per day. If they pay him 15 or 45 it changes nothing.
Ford wanted his employees to drive cars. Do you think 35 euro per day is a budget with room for cookies? Do you think it is justified for anyone to complaint about my salary? Show me the man brave enough to say it to my face? Each of these jobs involves someone having to tell you your salary. The body language is roughly that of a doctor telling you you have 1 week to live.
I just needed work asap, this was what was available. Not very surprising, no need to ask why the last guy left. I cant say I didn't enjoy it, it was a marvel of engineering that few get to see from the inside.
I remember a time in the 80's when manual labor paid really well. About 4000 vs 700 per month and purchase power was infinitely greater* People were proud, they cared about the company, they made an effort to keep things running, meet deadlines, run the extra mile. No one asked if they wanted to work overtime, it was obvious when the job had to be finished. People had a sense of duty.
Now the cookie factory has 5 job agencies with ~50 people looking for the next idiot to enslave in the factory only for the victim to vanish unexpectedly creating a constant state of panic and increased pressure on the recruiters.
It was hilarious how they shouted at me over the phone when my time to vanish came. Apparently they lost 3 that morning. During the call I looked up his salary online. I told him 3600 seemed nice but I wouldn't take a job shouting at people over the phone.
I've done cold calling too, I know shouting at people is not very likely to get you what you want. It is hard to convince a recruiter to increase the salary if his salary depends on not understanding it.
The spiel is obvious, they want to throw money at it until they find a stable pool of useful idiots that they won't have to pay.
It's been 8 years and the job offer is still plastered all over the job websites. They promise at least one 5 hour shift, you will be on call all week for all 3 shifts 7:00 till 23:00, have to be there in < 15 minutes.
In a context like that should we really blame those damn cashiers with their 5 euro salary? Oh wait, it is all self checkout now. Strange, the cookies are still 99 cents?
I read UK Railway workers earn wages 70 per cent above the national average. 28% / 1.7 = 16.47% Then they are "overpaid" 11.53% already.
You get 70% more purchase power for shall we say 7% more expensive tickets? (guestimating maintenance this time)
How much extra disposable income would that 70% produce? 1000% ? 2000% ?
It's probably a lot of cookies, cookies every day! I think the economy would like it.
Hi! Author here. Yes - this is a stereotype and it is unfortunate it exists (to some extent I think the blame should be placed on the profession that doesn't speak up). Good economics, whether theoretical or empirical models, should allow for multiple outcomes. Then when it is tested with data, conclusions can be drawn on what is likely or not. Many economics questions have these conclusions - it's just a lot of theories are mentioned over again, without actually referencing the fact that a lot of research has already been done and demonstrated a theory is no longer appropriate.
It all depends on where you point your microscope. This is the fundamental flaw of rationality - you can prove a very specific case, but when you try to make it apply generally, you run into problems.
So in this very specific case, the inflation that we've experienced over the past few years was NOT due to wage increases. You look in the microscope and see this to be true. Wages increases were not a primary cause of inflation (in this time period)
The problem is when you generalize and say 'Wage increases do not cause inflation'. The problem is that you have exited your historical context and you are moving into a new context. Wage increases certainly CAN contribute to inflation; they were not your most recent problem, but they might be your NEXT problem.
The other difficulty is that the human brain wants to be satisfied, it does not want to understand all possible context. So the brain loves it when you can just say "Here is the problem, the whole problem fits in this box, and here is the one single, simple cause of the problem."
That's reasonable, and this post is making that specific argument "that wages have not caused or continued the inflationary surge observed in 2021 to 2023." So I think you and the author agree here. I'm guessing the author would also agree that a blanket "wage growth doesn't cause inflation" statement would be too broad and not supportable.
Hi! Author here. This was actually my second article on wages and inflation (the first one can be found on my site - Dec 4, 2022 - Wages and Inflation). In that one I tackled the generalizability of the result, especially to the US economy. I 100% agree that for a result to hold, we need similar assumptions and conditions (basically the issue of external validity of a study). Regarding wage growth and inflation and the causality between the two, it actually has been studied quite heavily. From my previous post:
"Due to the simplicity and logical appeal of this theory [wage-price spirals], it has been heavily tested empirically. Most empirical studies to date suggest, however, that wages do not cause1 inflation. Schwerzer and Hess (2000) from the Cleveland Federal Reserve did an overview of the economic research at the time and found very little evidence supporting the idea that wages cause inflation. Only one study showed a causal impact2, while three others, and Schwerzer’s and Hess’ own work were not able to find this causality. The reason for the ambiguity in results is because inflation and wages move so closely together that attempting to separate and isolate which one causes which is not straightforward to do. Their own work focused solely on establishing the direction of causality, using what is called in economics and statistics “Granger causality”, which is a test whether the future values of one time series3 (inflation in our case) can be predicted by past values of another time series (nominal wage growth) and vice-versa. The review and analysis conducted by Schwerzer and Hess suggests that increasing wages do not cause inflation. On the contrary, evidence likely points to inflation driving increased wages."
So I would say so far the preponderance of evidence suggests there is unlikely to be causality of wage growth on inflation [in the US]. Multiple methods have shown the causal link is unlikely.
Are there circumstances in which wage growth can be the trigger of runaway inflation - I suppose there will be such conditions (how feasible/realistic they are is also a question). Have they occurred it in the US - does not appear so.
However, regarding the main issue at hand (i.e. current inflationary surge), there is even more evidence that it has not been the case, and we are nowhere near wage growth that would make us wonder about the wage-price spiral. Real wages are growing well below productivity.
Summarizing - you are 100% right that it is important to keep an eye out on external validity issues. It is also important to state the underlying assumptions (whether it is regarding the conditions of the economy or the mechanisms). It is something I am trying to get across with all of my writing and maybe could have done a better job in this particular case (although I have written a more theoretical post on the same topic, so that influenced the writing here)
2. Yes companies hide behind real effects as a justification.
3. Those effects are real anyway.
Wage increases are ONE driver of inflation. The size of this effect depends on a lot of things.
Price increases are ONE driver of inflation. The size of this effect depends on a lot of things.
When something does not go the way you want, you can't just pick the cause.
No matter what starts an avalanche, it will continue to propagate itself.
It's fine with me if you are mad at greedy companies.
It's fine with me if you are mad at me.
My request is that we get more comfortable with the idea that multiple causes can contribute to an effect, and the size of those contributions can change over time.
Deferring the discussion over a supposed lack of evidence is disingenuous. There is plenty of evidence in the article, though the Economist article provides very little.
Given economics is not a hard science, there will never be enough evidence in the world for conclusive "laws" as in physical science, so we have to make do with what we have, and there is a lot in the article to analyze.
Your point was "we need more evidence to justify these claims." I feel like the increase of people dying from homelessness is rather strong evidence real wages are not keeping up with inflation. Claiming wage growth causes inflation because companies "might" pass costs is also rather specious.
Humility also includes "Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize," from the HN guidelines. You avoid discussing the topic entirely, and focus on... an ad hominem? [1]
Talking about money is also good, because that's how I pay my bills.
anecdotally, I have noticed massive wage growth for non-college educated workers.
My teenage son who was still in high school at the time went from $10/hr to $17/hr as a restaurant worker in small town Florida. This was 2022-2023. In the same period, my salary as a principal software engineer went up 3%
You and your son are literally on opposite ends of the current economy. Tech is in possibly the worst recession since dotcom, while in-person services and retail pay is booming
So the pay situation you describe isn’t surprising at all
Tech stocks seem to be doing quite well. Of course, it's a convenient narrative to say that our sector is struggling.
For corporations who don't have a money machine, yes, it's not a good time. You will not get new funding. For established corporations, I'd say that it's pretty sunny days, especially considering layoffs.
Better to be a shareholder than an employee. Because as profits increase most of it will be captured by the former. Leaving the latter to fight tooth and nail for their share.
Have you looked at the sw Eng hiring landscape recently? One reason stocks are doing so well is cause of the cost cutting, layoffs, and hiring and promo freezes.
Stock prices have nothing to do with the employment landscape
I'm going to guess that 3% of your salary is significantly more than a 70% raise for a restaurant worker. You only got a smaller raise because you chose a metric that makes it look smaller.
In a thread about wages and inflation, I'd say the relevant metric is the one that lets you compare the two. Using percentages makes it clear that the son is actually, really making more money now, whereas the parent has less purchasing power now than a year ago (assuming this occurred over one year)
I think there's a logical explanation for this. Low skill jobs tend to have an oversupply of labor, relative to demand, so wages are going to hover around the cost of basic living. But as that cost of basic living skyrockets, wages are going to be naturally pushed up - simply because workers cannot afford to work for less.
But for higher wage earners basic cost of living expenses (food/energy/rent/etc) make up a smaller percent of their overall income, and so they are relatively less affected. And if they don't aggressively demand their pay keep up with inflation then their relative rate of gain will naturally fall behind.
What were your two salary increases like the previous 10 years? I get your son wasn't personally working those years, but a comparable worker saw little to no increases while white collar work generally trends with inflation year to year.
There was a hefty bit of catchup in the past few years for the lowest earners.
The elephant in the room that is driving inflation is energy prices. Every good has to be transported and that requires energy. Every production facility also requires electricity to run machines.
Energy prices happen to be going up because some people are ideologically committed to raising energy prices and reducing energy production in order to stop climate change. This includes the current US president, who signed a bunch of executive orders right after taking office that increased gas prices by restricting fossil fuel production.
The sanctions on a certain gigantic gas station that is currently at war with one of its neighbors are also a major driver of inflation. There was also transitory inflation due to pandemic era supply chain disruptions. When factories are shut down for health reasons, less stuff gets made and the price of that stuff goes up.
What did not cause inflation? People being able to buy houses, start businesses and find jobs because the interest rates were low. Raising interest rates and putting people out of work is just treating a symptom when the real solution to inflation is to lower energy prices by producing more energy. That means repealing anti-fossil fuel policies[0] and it also means trying to negotiate an end to wars rather than funding the belligerents forever with endless foreign aid.
[0]: Climate change is real and should be addressed via technology not austerity. We are not going to solve anything by making people in developed (1st world) countries poorer or by keeping people in developing (3rd world) countries poor. Those advocating climate austerity are the main motivating factor driving climate change denial because many people will assume its just a hoax powerful people made up to make them poorer.
> This includes the current US president, who signed a bunch of executive orders right after taking office that increased gas prices by restricting fossil fuel production.
>> FACT SHEET: Biden- Harris Administration Announces Temporary Pause on Pending Approvals of Liquefied Natural Gas Exports
The administration here more or less admits high energy prices are driving inflation. Otherwise, why would they pause new LNG export licenses, even to Europe, where we're fighting a proxy war with Russia and US LNG exports offer a way to hurt Russia and its economy and help our allies at the same time? The climate argument doesn't hold much water, since it isn't clear it won't just mean increased domestic consumption--given that greater supply will, and in fact has, result it much lower prices (which last checked are at pandemic levels)--and even if it does mean less foreign consumption, it could be offset by more consumption of coal and other environmentally worse alternatives to LNG.
It's clearly a last-ditch effort by the administration to pull on a deflationary lever before the election.
Inflating the money supply by billions of dollars to fund several expensive conflicts around the world seems like it would have a larger effect on inflation right? We are in the process of regularly shooting down 300$ drones with weapons systems that cost hundreds of thousands of dollars (sometimes millions) per shot. Should we really have deep concern about wages that companies freely decide to pay their employees? Isn't this completely insane regardless of what any kind of "the research" happens to say?
The US Money Supply (M2 & M1) has been falling pretty consistently since Russia's full-scale invasion of Ukraine in 2022. M0 is also down overall since the invasion, though it's gone through ups and downs.
I'm not certain the statement "Inflating the money supply by billions of dollars to fund several expensive conflicts" reflects reality.
Where does the money come from that funds these proxy wars? Taxes? Taxes barely cover half of what is spent year to year. Doesn't the rest comes from inflating the currency? Where else could it possibly come from? As long as we are running a massive deficit I can't understand how the money supply can actually decrease unless money is actively being taken out of circulation and deleted (regardless of what the federal reserve charts seem to say). This seems like an impossible task in a basic sense. People obviously notice when money is taken away or destroyed. Please make it make sense - I honestly don't understand.
There's a fair amount of confusion between map and territory in this article. It seems to take macroeconomic indicators like CPI, nominal wages, and real wages as fundamentals and then infer that the economy must behave a certain way because of historical relationships between them, when the reality is that the economy behaves as the economy behaves and the macroeconomic indicators only measure what's going on.
A good example is "By definition, inflation-indexed wages cannot result in a higher inflation rate. Wages indexed only to inflation will actually reduce the inflation rate, if productivity is positive, which it typically is." No - if you have an inflation-indexed wage, it will go up when inflation does, regardless of what productivity does. You can't just infer that productivity has risen because the inflation-indexed wage went up - in this specific instance, it's clear that it hasn't, because nothing has changed except the inflation index.
Inflation is best thought of as a feedback loop. Every expense is somebody else's income, so if expenses are going up across the economy, somebody is getting more money. That gives their suppliers leverage to raise prices and their customers a need to raise prices or go out of business. The rate is going to be uneven across different sectors, which is where the CPI vs. nominal vs. real wages behavior comes in. Real wage increases are nominal wages * CPI, by definition, so if most of the increase in prices is accruing to labor, real wages will be positive, while if most accrues to capital, real wages will be negative.
>so if most of the increase in prices is accruing to labor, real wages will be positive, while if most accrues to capital, real wages will be negative.
I am not asking this to be snarky, but do you recall any time in our lives where increase in prices mostly accrued to labor?
Hi! Author here! You are correct - that we have real wage growth. However, it is worth nothing that productivity has gone up 3-4% over the last several quarters (see FRED data). Wages should grow by this amount in real terms at least. That's where the standard assumption of 3.5% nominal wage growth comes from (2% inflation + 1.5% productivity growth). So the 1.8% real wage growth is, in my opinion, very low given the economy.
Labor productivity data can be hard to interpret over the short term because of its definition as real output / hours worked. If, for example, the government sends all non-essential workers home while continuing to pay them through PPP, productivity will rise because hours worked has gone down (as it did in 2020), even though no layperson would say that people were more productive during COVID. Similarly, if companies are laying off people without significant declines in output (as in the 2023 tech industry), this also shows up as increased productivity. If CPI is dropping but nominal output and hours worked remain constant, this also shows up as increased productivity (real output goes up, because of lower inflation), though this scenario should be pretty rare since actual prices are a major component of nominal output.
I'm reminded of a coworker who produced absolutely nothing of value for 18 months (his project was canceled at the end without ever launching), collected ~$1.5M in total comp, and worked 3-4 hour days. His productivity was sky-high: $1.5M in economic transactions for ~1000 hours worked. It's just that the economic transactions were basically lighting money on fire. For that matter, his department of ~3000 burned around $6B over ~5 years and is currently in the business of bricking otherwise-useful devices. It just had massive layoffs, but he transferred to another department, made his bosses look very good there, and survived the layoffs.
You really need a long enough time period to know whether the shitty quality products you put out will result in fewer transactions before you can interpret productivity data. Long-term (multi-year) productivity growth usually presages real wage gains. But short-term (couple quarters) productivity growth could just be an indicator of layoffs coming, which usually means real wage cuts.
... and what is the increase in real profit growth to capital? The point of my post wasn't that wages never go up, but I do not remember when price increase MOSTLY went to labor.
The bubonic plague would probably be the classical historical example - cutting the labor supply in ~half increased wages/prices across the board with no increase in profit to capital.
In a less somber example, unions in the 20th century had some notable successes at labor-driven inflation dynamics (i.e. at least classically until Reagan broke the back of labor by firing all the striking ATCs in the early 80s). While everyone's purchasing power shrunk because of the oil shocks in the 70s, labor unions were better at fighting back for their share of the pie than the rest - so perhaps not growth, but they were certainly winning the redistributive battle in the 70s.
Hi! Author here! - I think I agree with the general point you're making. To elaborate: I've actually written about the underlying inflation mechanism (May 10, 2023 - (Un)intuitive Inflation).
The main model used by central banks for modelling inflation is the New-Keynesian Model. This model explains that the rate of inflation is related to the level (sic) of real marginal costs, desired (Note: not realized) mark-up (profit margin) and inflation expectations. The main element through which wages feed through to inflation is the real marginal cost. However, if current wages are below pre-pandemic real wages (which for many still are), then real marginal cost is lower, thus pushing the inflation rate down below the 2% inflation target.
During the 2021-23 inflation surge, the supply shock and bottlenecks created significantly pushed up the real marginal cost of production (things like over-time, things like it taking to produce longer than before due to supply delays etc). This has reverted bringing back down the level of real marginal cost. Which is why we are close to the 2% inflation target.
The mechanism regarding price setting - between firms and workers - is actually really nicely put by a recent Werning and Lorenzoni paper - Inflation is Conflict. Interestingly, they are capable to generate a theoretical result where we have inflation with no money! Meaning there is no monetary policy.
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[ 6.0 ms ] story [ 235 ms ] threadManagement is not nearly as smart as they want us to think.
It is when you have an unlimited supply of workers with zero protections. The breaking of the social contract makes all the old rules no longer apply. They will drive us to the absolute edge of torches and pitchforks and keep us there, forever. They will come up with newer and better ways of determining where that line is, and just how far they can push it. And we will sit here like obedient dogs and take it.
I had a grocery store clerk eyeballing my checkout yesterday with absolute amazement at the "luxury" of buying TWO boxes of name brand cream cheese. We live in two completely seperate worlds at this point, and I don't think you have any idea how bad things have gotten for the bottom 90% in this country earning <$100k.
Like, me and my wife have a very decent combined income of over 100k, but even then - 10 years ago I would have thought that with that kind of money we'd be living like kings, but in reality it just lets us save some money at the end of the month and not a whole lot else. If we actually wanted to move up from our 900sqf house or get a slightly newer car, it would eat up into all of that quickly. I think we've reached a point now where I literally don't understand who in this country is buying all these new cars and goes on holidays twice a year(forget expensive ones - I mean a few days in Spain with a budget agency). And I definitely don't understand how a teacher on £27k a year(or a nurse) is expected to make ends meet. It feels like an erosion of society from the very core, where unless you are in the top 1% you just aren't even playing the same game.
I feel like I am the only person in my friendship group who can afford things like a decent place to live and good quality groceries. This is all from me working hard to move into Software engineering from a languages and humanities degree. Honestly feel that the system is severely broken if the only way to afford a decent quality of life is to get into one of the most lucrative professions out there. Most of the people in my job have been screwed over by the market and have way more rent than me as well, so are probably not even able to do the things I can.
I feel a lot of pressure to get into FAANG or something in order to hope to ever get a house in my lifetime. Especially since my landlord threatened to put up my rent by like £400 the other day and my boss told me my raises will never keep up with inflation. But I'm a humanities person. I don't see myself becoming some sort of 10x engineer without it making me miserable. So, since the absolutely fucked announcements from my landlord and boss, I'm thinking of any way to leave this economic shithole of a country.
If you’re 25, you might as well spend your evenings trying to upskill. Make time for important things, but trim unnecessary leisure and invest in your skills/expertise/network. It’s much harder to do this when older.
Personally I continued to improve my technical skills, especially in getting into new areas like AI, while also building considerable domain knowledge, and taking on management responsibilities. You don’t really have to compete directly with yon 10x STEM rockstars - go for breadth, not proficiency. Someone who understands a lot of areas fairly well, and can communicate and document well, is incredibly useful to an organisation.
There might be some really tough maths on that course, but I’d argue it’s not exactly necessary. There’s undoubtedly a lot of people doing high paying “AI” related jobs whose main qualification is being able to identify a use case and coordinate a project staffed by engineers and data scientists.
Hyperbole is for good storytelling, not nuanced discussion or argument.
They will drive us to the absolute edge of torches and pitchforks and keep us there, forever.
Hardly an exaggeration to call this doomsaying.
You seem very petulant.
Or they would have to resort do massive immigration, destroying culturally their own country in the process, and laying the path to being replaced in the long run.
None of this path is good for them.
> I LL just let people make their own opinion of you.
That's rich coming from the guy who is selling (unironically, best I can tell) genocide. I mean, your narcy-ness is almost agreeable relative to that.
I live in a country where homes for the elderly (and the health system at large) have managed to remain profitable while overpaying doctors and severely underpaying just about anyone else. Now we're two months into a failing doctors' strike (because the doctors feel like they can extort an even higher wage from the state) and we're on the way to sign a memorandum for easier worker immigration from Phillipines because we need nursing and medical assistance staff and the (heavily subsidized and mostly state-ran) healthcare institutions can't by law pay native staff a fair wage.
What I can gather from that so far is that it sucks when you're being fucked over by a free market economy because some venture capitalist is being a miser, but it's 10 times worse when the miser is a legitimately legislated government. Immigration is not just a xenophobia issue, it's a genuine concern when an entity realizes it doesn't need to spend as much and starts mass importing cheap manpower from the other side of the globe.
[1] https://news.ycombinator.com/item?id=39533166
The root cause IMHO is that especially in the US there is barely any competition any more. No matter where you look, it's at most five to six different (multi)national megacorporations... and so they can extract many billions of dollars from the economy every month. Enshittification, just on macroeconomic scale.
Everyone should be making $20 per hour minimum wage!
$20 minimum wage granted (walmart, tons of others)
Everyone should be making $40 per hour minimum wage!!
Ugh...
Big print newspapers were mostly independent and subscriber-funded, so they answered to their subs rather than advertisers.
The Economist is still independent and subscriber-funded. But, most sub-driven publications now have to fight tooth and nail to stay above water, so the writing needs to be tailored towards engagement/clicks :/
There was also more a desire to serve public interests prior to Reagan getting rid of the rules on media consolidation. It wasn’t perfect but it was much better than what we have now. News media is much more beholden to corporate interests now than in the past.
https://en.wikipedia.org/wiki/Yellow_journalism
Pretty much every local newspaper has been bought up and now almost exclusively talks about ads... err.. I mean national issues. And it isn't even articles that these papers write, rather just the same article published by someone like The McClatchy Company.
Same thing happened to broadcast news.
This has never (really) been the case with "mainstream" media. "The media" in common parlance is a farce. Historical news has almost always been agenda driven, and was key to the American revolution, Labor reforms in the US, etc. Those things are not "mainstream media."
Yup. Soon enough it'll just be two guys arguing over a fair price for Canada.
edit: the site layout seems completely messed up in chrome
> "The problem – economics research has repeatedly shown that this is not the case."
And economics research has also repeatedly shown that this IS the case. I'm not supporting that argument, I'm just saying that you have conflicting bodies of research. Everyone here is engaging in motivated reasoning, depending on who they think the boogie-man is.
Humility means being clear about how much you can possibly say from the evidence at hand. Humility means thinking more about confounding factors than about things that you believe to be true.
I'd also love if we talked more about access to resources instead of money.
* Companies have normal profitability in the long run in a competitive market.
* If costs go up, companies must raise prices to maintain normal profitability.
* If wages increase, costs go up.
Here is the paper I assume is referenced in this article: https://www.google.co.uk/books/edition/Wage_Growth_and_Infla...
But the blog article says: "The Economist piece appears to have repeated the old theory that wage growth causes inflation spirals. As discussed, empirical evidence shows this is not true"
I don't think many economists would argue that wage inflation causes no price inflation, and that also doesn't seem to be the finding of the paper they are referring to - which finds that wages CAN create inflation. The debate is about the amount of passthrough (e.g. how much an increase in wages affects an increase in the price of goods).
Then the blog article says:
> there is evidence that it is elevated inflation that causes wage increases.
But that can be true while the opposite is also true. Inflation can cause wage increases. Wage increases can increase costs. Increasing costs can lead to price increases. Price increases cause inflation. Inflation can cause wage increases. Each step in diminishing quantities, but still multiplying the initial effect of inflation.
I think this article is very cherry-picky of the facts.
Due to the simplicity and logical appeal of this theory, it has been heavily tested empirically. Most empirical studies to date suggest, however, that wages do not cause1 inflation. Schwerzer and Hess (2000) from the Cleveland Federal Reserve did an overview of the economic research at the time and found very little evidence supporting the idea that wages cause inflation. Only one study showed a causal impact2, while three others, and Schwerzer’s and Hess’ own work were not able to find this causality. The reason for the ambiguity in results is because inflation and wages move so closely together that attempting to separate and isolate which one causes which is not straightforward to do. Their own work focused solely on establishing the direction of causality, using what is called in economics and statistics “Granger causality”, which is a test whether the future values of one time series3 (inflation in our case) can be predicted by past values of another time series (nominal wage growth) and vice-versa. The review and analysis conducted by Schwerzer and Hess suggests that increasing wages do not cause inflation. On the contrary, evidence likely points to inflation driving increased wages."
So I would say so far the preponderance of evidence suggests there is unlikely to be causality of wage growth on inflation. Multiple methods have shown the causal link is unlikely.
However, it is true that if wages didn't rise (that is workers would take real pay cuts) then inflation would fall, which is the main channel central bank interest rate hikes work to reduce inflation.
What is more important in the current inflationary surge, is that the behavior of wages is entirely consistent with previous similar historic inflationary episodes. If anything, they're actually a bit lower than in the past. The focus on wage growth as a concern is not warranted at these levels.
That is only true if salaries make up a significant amount of production.
My favorite example was a job at a cookie factory. A hall full of giant machines, multiple production lines. Mine, counting 5 humans produced FIVE HUNDRED THOUSAND boxes of cookies per day that cost 99 cent in the store. In a 5 hour shift I earned 35 euro.
5 X 35 = 175
500000/175 = 2857 euro for each 1 euro worth of salaries
IOW salaries make up 0.035% of what customers pay.
Would the cashier or the truck driver be earning 100 k per day? The 30 ish people in the office? Would they get 100k for "running" multiple production lines?
It is frankly insulting we pay people to talk economic rubbish like that. The giant building, the ovens & production lines, the trucks and the ingredients must be handed down by the gods for free?
In my current job I clean trains for ohh something between 5000 and 20 000 people per day. Assuming a 20 k day each traveler pays me 0.0075 euro while a ticket costs [say] 50 on average. THREE out of TWENTY THOUSAND pay for my labor.
They need multiple people to clean and drive the train of course. It quickly adds up to.... nowhere near a million euro.
Building a train, train stations and laying track involves a lot of people but it isn't that (to put it scientifically) the workers are pulling the rails out of their ass or are hammering out the components on an anvil. It involves a ton of equipment.
So they put down tracks 50 years ago using machines build 60 years ago in factories build 70 years ago using tools made 80 years ago in factories build 120 years ago. etc
Lots of labor, it took very few economists. They sit in the train, eating cookies, complaining about how expensive the ticket is. One says it must be labor, they are still talking about this to this very day and will continue to do so until the end of time.
As an aside, I think you might be underestimating the percentage of costs that staffing take - Take your example of train operations.
The report below shows that Staffing Costs are approx. 28% of a train operators costs within the UK (NB: this would not include costs maintaining the rails).
https://www.orr.gov.uk/sites/default/files/om/toc-benchmarki...
In your job with the cookie factory, you are also underestimating the amount of labour - I assume there were office staff, people who transported the cookies, people who made the raw ingredients, shopkeepers who put it on the shelf, all of whom have to be paid for within the ultimate retail cost. At that scale of production you will also require technical managers, maintenance engineers, marketing teams, QAs...
Long long ago there was a bakery, the owner baked cookies and sold them. People were able to buy the cookies. He made a living doing that. We've somewhat upgraded the process from there.
We went from factories full of people producing many cookies to halls full of machines. We went from really expensive custom machines to unbelievably cheap ones.
The maintenance engineer works many lines, he has to do some work when something breaks but between those repairs tens of millions of cookies are produced. The designer does his job every 1-2 billion boxes of cookies but only if it is a custom job. If it is a generic machine it will be many billions more. He costs 20-30 boxes of cookies per day. If they pay him 15 or 45 it changes nothing.
Ford wanted his employees to drive cars. Do you think 35 euro per day is a budget with room for cookies? Do you think it is justified for anyone to complaint about my salary? Show me the man brave enough to say it to my face? Each of these jobs involves someone having to tell you your salary. The body language is roughly that of a doctor telling you you have 1 week to live.
I just needed work asap, this was what was available. Not very surprising, no need to ask why the last guy left. I cant say I didn't enjoy it, it was a marvel of engineering that few get to see from the inside.
I remember a time in the 80's when manual labor paid really well. About 4000 vs 700 per month and purchase power was infinitely greater* People were proud, they cared about the company, they made an effort to keep things running, meet deadlines, run the extra mile. No one asked if they wanted to work overtime, it was obvious when the job had to be finished. People had a sense of duty.
Now the cookie factory has 5 job agencies with ~50 people looking for the next idiot to enslave in the factory only for the victim to vanish unexpectedly creating a constant state of panic and increased pressure on the recruiters.
It was hilarious how they shouted at me over the phone when my time to vanish came. Apparently they lost 3 that morning. During the call I looked up his salary online. I told him 3600 seemed nice but I wouldn't take a job shouting at people over the phone.
I've done cold calling too, I know shouting at people is not very likely to get you what you want. It is hard to convince a recruiter to increase the salary if his salary depends on not understanding it.
The spiel is obvious, they want to throw money at it until they find a stable pool of useful idiots that they won't have to pay.
It's been 8 years and the job offer is still plastered all over the job websites. They promise at least one 5 hour shift, you will be on call all week for all 3 shifts 7:00 till 23:00, have to be there in < 15 minutes.
In a context like that should we really blame those damn cashiers with their 5 euro salary? Oh wait, it is all self checkout now. Strange, the cookies are still 99 cents?
I read UK Railway workers earn wages 70 per cent above the national average. 28% / 1.7 = 16.47% Then they are "overpaid" 11.53% already.
You get 70% more purchase power for shall we say 7% more expensive tickets? (guestimating maintenance this time)
How much extra disposable income would that 70% produce? 1000% ? 2000% ?
It's probably a lot of cookies, cookies every day! I think the economy would like it.
Besides - if the cookies are still 99 cents after all these years then they actually are cheaper in real terms.
So in this very specific case, the inflation that we've experienced over the past few years was NOT due to wage increases. You look in the microscope and see this to be true. Wages increases were not a primary cause of inflation (in this time period)
The problem is when you generalize and say 'Wage increases do not cause inflation'. The problem is that you have exited your historical context and you are moving into a new context. Wage increases certainly CAN contribute to inflation; they were not your most recent problem, but they might be your NEXT problem.
The other difficulty is that the human brain wants to be satisfied, it does not want to understand all possible context. So the brain loves it when you can just say "Here is the problem, the whole problem fits in this box, and here is the one single, simple cause of the problem."
(Apologies for overusing the word 'problem')
"Due to the simplicity and logical appeal of this theory [wage-price spirals], it has been heavily tested empirically. Most empirical studies to date suggest, however, that wages do not cause1 inflation. Schwerzer and Hess (2000) from the Cleveland Federal Reserve did an overview of the economic research at the time and found very little evidence supporting the idea that wages cause inflation. Only one study showed a causal impact2, while three others, and Schwerzer’s and Hess’ own work were not able to find this causality. The reason for the ambiguity in results is because inflation and wages move so closely together that attempting to separate and isolate which one causes which is not straightforward to do. Their own work focused solely on establishing the direction of causality, using what is called in economics and statistics “Granger causality”, which is a test whether the future values of one time series3 (inflation in our case) can be predicted by past values of another time series (nominal wage growth) and vice-versa. The review and analysis conducted by Schwerzer and Hess suggests that increasing wages do not cause inflation. On the contrary, evidence likely points to inflation driving increased wages."
So I would say so far the preponderance of evidence suggests there is unlikely to be causality of wage growth on inflation [in the US]. Multiple methods have shown the causal link is unlikely.
Are there circumstances in which wage growth can be the trigger of runaway inflation - I suppose there will be such conditions (how feasible/realistic they are is also a question). Have they occurred it in the US - does not appear so.
However, regarding the main issue at hand (i.e. current inflationary surge), there is even more evidence that it has not been the case, and we are nowhere near wage growth that would make us wonder about the wage-price spiral. Real wages are growing well below productivity.
Summarizing - you are 100% right that it is important to keep an eye out on external validity issues. It is also important to state the underlying assumptions (whether it is regarding the conditions of the economy or the mechanisms). It is something I am trying to get across with all of my writing and maybe could have done a better job in this particular case (although I have written a more theoretical post on the same topic, so that influenced the writing here)
"It’s now significantly more deadly to be homeless [in Cali]. Why are so many people dying?"
https://news.ycombinator.com/item?id=39578218
The idea wage increases are inflation is a disgusting.
No reason to cap wages because companies "might" pass the cost to consumers. They are already raises prices simply for more profits.
2. Yes companies hide behind real effects as a justification.
3. Those effects are real anyway.
Wage increases are ONE driver of inflation. The size of this effect depends on a lot of things.
Price increases are ONE driver of inflation. The size of this effect depends on a lot of things.
When something does not go the way you want, you can't just pick the cause.
No matter what starts an avalanche, it will continue to propagate itself.
It's fine with me if you are mad at greedy companies.
It's fine with me if you are mad at me.
My request is that we get more comfortable with the idea that multiple causes can contribute to an effect, and the size of those contributions can change over time.
Given economics is not a hard science, there will never be enough evidence in the world for conclusive "laws" as in physical science, so we have to make do with what we have, and there is a lot in the article to analyze.
Your point was "we need more evidence to justify these claims." I feel like the increase of people dying from homelessness is rather strong evidence real wages are not keeping up with inflation. Claiming wage growth causes inflation because companies "might" pass costs is also rather specious.
Humility also includes "Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize," from the HN guidelines. You avoid discussing the topic entirely, and focus on... an ad hominem? [1]
Talking about money is also good, because that's how I pay my bills.
[1] https://www.wordnik.com/words/ad%20hominem
My teenage son who was still in high school at the time went from $10/hr to $17/hr as a restaurant worker in small town Florida. This was 2022-2023. In the same period, my salary as a principal software engineer went up 3%
So the pay situation you describe isn’t surprising at all
For corporations who don't have a money machine, yes, it's not a good time. You will not get new funding. For established corporations, I'd say that it's pretty sunny days, especially considering layoffs.
Stock prices have nothing to do with the employment landscape
But for higher wage earners basic cost of living expenses (food/energy/rent/etc) make up a smaller percent of their overall income, and so they are relatively less affected. And if they don't aggressively demand their pay keep up with inflation then their relative rate of gain will naturally fall behind.
There was a hefty bit of catchup in the past few years for the lowest earners.
Energy prices happen to be going up because some people are ideologically committed to raising energy prices and reducing energy production in order to stop climate change. This includes the current US president, who signed a bunch of executive orders right after taking office that increased gas prices by restricting fossil fuel production.
The sanctions on a certain gigantic gas station that is currently at war with one of its neighbors are also a major driver of inflation. There was also transitory inflation due to pandemic era supply chain disruptions. When factories are shut down for health reasons, less stuff gets made and the price of that stuff goes up.
What did not cause inflation? People being able to buy houses, start businesses and find jobs because the interest rates were low. Raising interest rates and putting people out of work is just treating a symptom when the real solution to inflation is to lower energy prices by producing more energy. That means repealing anti-fossil fuel policies[0] and it also means trying to negotiate an end to wars rather than funding the belligerents forever with endless foreign aid.
[0]: Climate change is real and should be addressed via technology not austerity. We are not going to solve anything by making people in developed (1st world) countries poorer or by keeping people in developing (3rd world) countries poor. Those advocating climate austerity are the main motivating factor driving climate change denial because many people will assume its just a hoax powerful people made up to make them poorer.
I'm sorry, what?
https://www.cnn.com/2023/12/19/business/us-production-oil-re...
https://www.whitehouse.gov/briefing-room/statements-releases...
https://www.nytimes.com/2023/09/29/climate/biden-offshore-dr...
This is just the most recent ones.
>> FACT SHEET: Biden- Harris Administration Announces Temporary Pause on Pending Approvals of Liquefied Natural Gas Exports
The administration here more or less admits high energy prices are driving inflation. Otherwise, why would they pause new LNG export licenses, even to Europe, where we're fighting a proxy war with Russia and US LNG exports offer a way to hurt Russia and its economy and help our allies at the same time? The climate argument doesn't hold much water, since it isn't clear it won't just mean increased domestic consumption--given that greater supply will, and in fact has, result it much lower prices (which last checked are at pandemic levels)--and even if it does mean less foreign consumption, it could be offset by more consumption of coal and other environmentally worse alternatives to LNG.
It's clearly a last-ditch effort by the administration to pull on a deflationary lever before the election.
https://tsscolorado.com/dems-unveil-system-changer-bills-to-...
I'm not certain the statement "Inflating the money supply by billions of dollars to fund several expensive conflicts" reflects reality.
A good example is "By definition, inflation-indexed wages cannot result in a higher inflation rate. Wages indexed only to inflation will actually reduce the inflation rate, if productivity is positive, which it typically is." No - if you have an inflation-indexed wage, it will go up when inflation does, regardless of what productivity does. You can't just infer that productivity has risen because the inflation-indexed wage went up - in this specific instance, it's clear that it hasn't, because nothing has changed except the inflation index.
Inflation is best thought of as a feedback loop. Every expense is somebody else's income, so if expenses are going up across the economy, somebody is getting more money. That gives their suppliers leverage to raise prices and their customers a need to raise prices or go out of business. The rate is going to be uneven across different sectors, which is where the CPI vs. nominal vs. real wages behavior comes in. Real wage increases are nominal wages * CPI, by definition, so if most of the increase in prices is accruing to labor, real wages will be positive, while if most accrues to capital, real wages will be negative.
I am not asking this to be snarky, but do you recall any time in our lives where increase in prices mostly accrued to labor?
I'm reminded of a coworker who produced absolutely nothing of value for 18 months (his project was canceled at the end without ever launching), collected ~$1.5M in total comp, and worked 3-4 hour days. His productivity was sky-high: $1.5M in economic transactions for ~1000 hours worked. It's just that the economic transactions were basically lighting money on fire. For that matter, his department of ~3000 burned around $6B over ~5 years and is currently in the business of bricking otherwise-useful devices. It just had massive layoffs, but he transferred to another department, made his bosses look very good there, and survived the layoffs.
You really need a long enough time period to know whether the shitty quality products you put out will result in fewer transactions before you can interpret productivity data. Long-term (multi-year) productivity growth usually presages real wage gains. But short-term (couple quarters) productivity growth could just be an indicator of layoffs coming, which usually means real wage cuts.
In a less somber example, unions in the 20th century had some notable successes at labor-driven inflation dynamics (i.e. at least classically until Reagan broke the back of labor by firing all the striking ATCs in the early 80s). While everyone's purchasing power shrunk because of the oil shocks in the 70s, labor unions were better at fighting back for their share of the pie than the rest - so perhaps not growth, but they were certainly winning the redistributive battle in the 70s.
https://fred.stlouisfed.org/series/CP
The situation since 2023 really has been price inflation largely accruing to labor.
The main model used by central banks for modelling inflation is the New-Keynesian Model. This model explains that the rate of inflation is related to the level (sic) of real marginal costs, desired (Note: not realized) mark-up (profit margin) and inflation expectations. The main element through which wages feed through to inflation is the real marginal cost. However, if current wages are below pre-pandemic real wages (which for many still are), then real marginal cost is lower, thus pushing the inflation rate down below the 2% inflation target.
During the 2021-23 inflation surge, the supply shock and bottlenecks created significantly pushed up the real marginal cost of production (things like over-time, things like it taking to produce longer than before due to supply delays etc). This has reverted bringing back down the level of real marginal cost. Which is why we are close to the 2% inflation target.
The mechanism regarding price setting - between firms and workers - is actually really nicely put by a recent Werning and Lorenzoni paper - Inflation is Conflict. Interestingly, they are capable to generate a theoretical result where we have inflation with no money! Meaning there is no monetary policy.