Inflation and the threat of a wage-price spiral, according to Roberto Perotti

Inflation has been rising for weeks, enveloping most developed economies, especially the western world, from Europe to the US, and even Asia. Price increases have soared to their highest levels in many years, driven by rising electricity and gas prices.

The most recent data from the Italian National Institute of Statistics (ISTAT) for Italy, referring to December 2021, refer to a 3.9% increase in one year, with increases not only in energy bills but also in foodstuffs.

Just how is inflation linked to and influenced by labour market developments? The labour market will largely determine whether the sharp rise in prices in recent months will remain a temporary flare-up or a lasting phenomenon, economists Tito Boeri and Roberto Perotti explained in La Repubblica.

Increasing vacancies and voluntary resignations around the world in turn risk pushing up both prices and wages. Economists refer to this as a wage-price spiral, which could prolong the rise in inflation for a long time.

Breaking it down

Let’s start with some definitions. In general, inflation is a general and steady increase in the price of goods and services. The first and most obvious consequence of inflation, therefore, is a drop in both the value and purchasing power of money.

The first and most obvious consequence of inflation, therefore, is a drop in both the value and purchasing power of money

The fallout in living standards for workers, especially those on fixed salaries, as inflation rises is immediate. You can spot this phenomenon simply by going shopping.

The collective priority for fighting inflation is therefore to strive for better wages. Last June, US President Joe Biden, faced with the difficulties of American companies complaining that they could not find workers, found the most intuitive and in some ways obvious solution: he suggested that companies pay them more and, perhaps, grant more attractive benefits. “Pay them more“, he said at a press conference.

And indeed, there has already been a wage increase in the United States, even for low-skilled workers. Businesses began vying with each other on wages to secure the necessary labour.

The same happened in the UK, especially during the Christmas holidays. In Germany, an agreement by the new government coalition of Socialists, Liberals and Greens included a 25% hike in the minimum wage. And wages in France have already increased by 2.2% in October.

The Wage-Price Spiral

However, raising wages, in itself, is not good news. The race to the top, with workers demanding higher salaries because they see their purchasing power decreasing, could in fact end up becoming a dangerous spiral. This is what economists refer to as a wage-price spiral.

If wages are rising because productivity is increasing, this is good news, and inflation should decrease over time, which will also benefit workers. But if wages and prices chase each other in an upward push, the effect is quite different: if workers demand higher wages to keep up with an increase in the cost of living, companies in turn may raise prices because of higher labour costs. This would create a vicious circle that could drag out inflation for a long time.

This is precisely where the risk should be avoided. “The bad news is if inflation triggers a wage-price spiral: wages rise to keep up with rising prices, prices rise to defend profit margins from rising wages, and so on, explains Roberto Perotti, economist at Bocconi University in Milan.

The bad news is if inflation triggers a wage-price spiral

Roberto Perotti, economist at Bocconi University in Milan

How things stand in the market

From the United States to Europe, companies today are experiencing labour shortages, amidst an increase in resignations and a new propensity that has emerged from the pandemic to give new meaning and value to work by reducing the threshold of acceptance of low wages and hammering work rhythms. Not to mention the skills mismatch from which many countries suffer as the world’s economies move towards green and digital transition.

However, it is not only skilled professionals who are untraceable, but also low-skilled workers. This is already pushing companies, especially the larger ones, to compete with each other by offering higher wages to grab workers.

It is still too early to speak of an effect of price growth on the labour market in Italy, as Perotti explains: “Right now, inflation alone, I think, has a very marginal impact in Italy. In terms of employment, the market is still reeling from the consequences of COVID in many sectors“.

Right now, inflation alone, I think, has a very marginal impact in Italy

Roberto Perotti, economist at Bocconi University in Milan

If anything, the problem of Italian employment at this stage could be caused by the fear of contagion linked to a fresh wave of COVID. This may also help to explain why recruitment difficulties have increased over the past two years, as more contagious variants of the virus have spread. The vacancy rate in the third quarter of 2021, stable compared to the second quarter, remains high at 1.8%, although lower than in other European countries.

Perotti points out that this “is one possible explanation for why the job vacancy rate also include low-skilled jobs: it is the highest since the ISTAT survey began”.

Demographics should also not be overlooked when it comes to job shortages. “Considering that the over 45s in Italy in 2019 were 53.5%”, Perotti concludes, “the effects on the labour market could also already be there: while only a hypothesis, it is nevertheless plausible. Although I suspect that it is mainly younger candidates who are more comfortable in the digital world who have become more selective in choosing and accepting a job. However, we have no evidence of this either at the moment”.


Di |2024-07-15T10:06:47+01:00Febbraio 2nd, 2022|english, Future of Work, Lifestyle, MF|0 Commenti