Do higher wages cause inflation?

Do higher wages cause inflation?

Robert Pollin addresses wages and prices -   March 7, 2010
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Robert Pollin is Professor of Economics and founding Codirector of the Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst. His research centers on macroeconomics, conditions for low-wage workers in the US and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the US. Most recently, he co-authored the reports Job Opportunities for the Green Economy (June 2008) and Green Recovery(September 2008), exploring the broader economic benefits of large-scale investments in a clean-energy economy in the US. He has worked with the United Nations Development Programme and the United Nations Economic Commission on Africa on policies to promote to promote decent employment expansion and poverty reduction in Latin America and sub-Saharan Africa. He has also worked with the Joint Economic Committee of the US Congress and as a member of the Capital Formation Subcouncil of the US Competiveness Policy Council.


Do higher wages cause inflation?PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. Joining us now is Robert Pollin. He's the cofounder and codirector of the PERI institute at the University of Massachusetts Amherst. Thanks for joining us again.


JAY: So in some of the interviews we've done and some of the articles you've written, one of your proposals is for a big government jobs program at decent wages.

POLLIN: Right.

JAY: So retrofitting buildings, state projects for infrastructure and roads and such, at pretty serious levels—we're talking hundreds of thousands of jobs at good wages.

POLLIN: Millions of jobs.

JAY: Millions of jobs.


JAY: Well, millions of jobs at good wages, people will argue, will tend to raise wages generally in the economy, because the more desperate people are, the cheaper they work, and if there's this kind of a government program, people won't be as desperate. But the underlying issue here is, the critique is made that, if you wind up with all this job program, it will be inflationary because wages will go up. So the question is: do higher wages really lead to inflation?

POLLIN: No, they don't necessarily. What higher—lower unemployment does lead to workers having more bargaining power, and I would argue that's good, especially where we've been historically, where wages are roughly on average 10, 12 percent below where they were 38 years ago, in 1972, whereas the average productivity, what a worker produces in the course of a day, has almost doubled, is up 90 percent. So workers have not enjoyed any of the benefits of being more productive. So on those grounds, workers have taken a huge hit over two generations. And what about the inflationary effect? The only way higher wages can cause inflation is if the wages are rising faster than your ability to produce things, because otherwise the pie is getting bigger and workers are just getting their equal or maybe even a smaller share of a growing pie. It's only if the pie is not growing, and then the wages get bigger, and then businesses try to make up for the difference by raising the prices faster. And that's what's the inflationary part.

JAY: Well, the argument goes that if you're in a city where, say, you have an auto industry, and back in the days when autoworkers were making $28, and if the economy was really revved up and you had a lot of workers making, you know, decent salaries—more than, sometimes, decent salaries, in a sense, compared to, certainly, unorganized workers—but a merchant, a store, is going to sell as high as they possibly can. So if workers have more money, the prices will go up. And you talk to unorganized workers, and you hear them saying this: like, what's even the point of fighting for higher wages, 'cause as soon as you do, they're just going to charge you more anyway? It's not true?

POLLIN: Well, I mean, there's some point to it, but keep in mind that if the store is raising its prices and people are coming in and buying things at higher prices, that's good. That means that the market is buoyant. So the fact that you have more demand in the economy and that may be pushing up prices a little bit, modestly, there's really nothing wrong with it. It's actually positive. We should keep that in mind. So there's a big difference between, say, a 4 percent inflation rate, 3.5 percent inflation rate, due to rising demand. That's quite healthy. The unhealthy inflation is when you get these, like, basically, oil price increases shooting up really fast, and that causes a spiral: when oil prices go up, then everybody else tries to raise their prices. And the people that are getting the money out of this are the oil companies and the Arab oil producers and other oil producers. So the key thing is to distinguish between those two different kinds of inflation. And inflation due to strong overall markets, workers feeling good, workers willing to spend more, that's really positive as long as, you know, it's within control.

JAY: Well, isn't the other piece of this, which doesn't get talked about very much—let's say productivity is going up, wages start to go up. But there is another piece to this, which is profits, which is if a given company is going to sell this item, if the wages are going up, it may not necessarily lead to higher prices, but it may lead to less profit and more of that surplus going to wages and to profit.

POLLIN: Which is also healthy.

JAY: That doesn't get talked about much. It's always, always talked about as if it's only about inflation.

POLLIN: Right. I mean, look, inflation ultimately is a very simple thing: it's businesses raising their prices. It has actually, when you just talk about the inflation, inflation is businesses raising prices. Directly it has nothing to do with wages per se. So if businesses have higher wages, which means higher business costs, okay, right, they can also take a lower profit margin. And one of the things that we all know has happened over the last generation has been extreme increases in inequality, which means that profits have gone up dramatically relative to the average wage. So for there to be some basic adjustment downward towards more equality is a very favorable development that most people agree with.

JAY: So just finally, the wages have been more or less static, stagnant, since about the early '70s. And productivity's done what over the same period?

POLLIN: Roughly doubled.

JAY: More than doubled.

POLLIN: Yeah, yeah.

JAY: Thanks for joining us.

POLLIN: Okay. Thank you.

JAY: And thank you for joining us on The Real News Network.

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