Penguins have wings, so why can’t they fly?
It is common to see economists saying that once wages start to rise, inflation will rise too.
Yet, I have been writing that inflation may not rise if wages rise. The reason is that capital income is consuming in historically tremendous amounts. And a rise in wages could mean a decline in profits, which would mean a decline in consumption by capital income.
Well, today, an article came out in the Wall Street Journal by Josh Bivens, Debunking the Myth of Wage-Led Inflation. In the article, he pointed out that almost all of the inflation gains since the crisis have come from profits, not from labor costs.
“… what’s really striking about price growth since the end of the Great Recession is how much of it has been driven by rising profits, not rising labor costs.”
“… Profits earned per unit sold… have been rising at an average annual growth rate of nearly 9% since the recovery’s beginning. To the degree that there is any inflationary pressure in the U.S. economy over that time, it is surely not coming from labor costs.”
“The results are striking–prices in the non-financial corporate sector rose an average of 1% per year since the end of the Great Recession. But fully 100% of this increase can be explained by rising unit profits.”
“These data help explain why many economists, including me, just can’t get very worried that rapidly rising labor costs will spark an increase in inflation.”
The idea is that when we look at the inflation that we have right now, we have to recognize that it is almost completely supported by capital income based on profits. So if rising wages leads to a cut in profits, inflation may not rise at all. It’s like inflating and deflating a balloon at the same time.
The Wall Street Journal is picking up on the idea.