Disclosure of the Labor Market: Did Wage-Price Spiral and Tight Labor Market Increase Inflation? 

By Wenju Yang ’24, Alex Robert ’24, Chris Laprade ’24

Contributing writers

Imagine the year is 2021, you’re a Trinity student and your favorite local shops and restaurants are finally starting to reopen after a long year of a closed economy. You wear your protective mask and head to Peter B’s, where you finally see that beloved “WELCOME” sign on their front door. You’re about to order your favorite croissant, but you notice that what once cost $6, is now $8.50. What is this sudden reason for a price hike? According to your friend across the counter, the word on the street is that the tightening job market (meaning more jobs than workers) makes goods more expensive. But is the job market really the inflation driver we think it is? Let’s break it down for us common people to understand, leaving the graphs and charts for the nerdy economists.

The pandemic caused great harm to the U.S. job market, creating mass amounts of layoffs and sending unemployment rates through the roof as businesses closed their doors for service. However, by the time 2023 rolled around, the makeup of the job market looked quite different. Jobs bounced back stronger than ever, even surpassing pre-pandemic levels. Which in theory, sounds great, right? More jobs would mean less unemployment, and people would generally have more money. However, with this rebound came a strong economic theory that the tight job market post-pandemic could be why your croissant costs more. This conclusion stemmed from the reasoning that with fewer workers unemployed, companies would hike wages to try and attract workers from their competitors, leading to an increase in prices as businesses pass their higher costs onto consumers. However, when examined thoroughly, we found that the link between an overcrowded job market and rising prices isn’t as straightforward as the tight labor market theory suggests.

As the U.S. economy gradually recovered from the pandemic and people returned to the labor market, the inflation rate wasn’t only driven by wage growth and consumption due to the strong labor market. We need to learn and understand that the initial inflation spikes were primarily a result of the global supply-side constraints caused by COVID-19. These constraints included disrupted supply chains (like the chips’ production), high transportation costs and a shift in consumer behavior as the pandemic altered our habits. 

Did the wage-price spiral cause the excess demand in the U.S. economy? We see more and more people shopping and eating out again, but is the consumption level high enough to push another inflation hike? Actually, there were diverged branches of the inflation rate and income level in Q2 2021: the core PCE increased by 6% compared with the last period, but the income level dropped by around 15% (data from the Fed). Even though wages went up gradually from 2021 to 2023, they didn’t spiral out of control or push prices up in the terrifying wage-price spiral we often hear about on TV. The percent change of income level was small (the percent growth rate is less than 1%, and it dropped in September 2021 and June 2022). Instead, according to our research, prices were more impacted by other factorsᅳexternal shocks like geopolitical crises or changes in how much companies charge above their costs. In addition, we found that even though the consumption level increased, its growth was slow and below both the trend and price growth. People’s wages and consumption are still trying to catch the crazy price today.

Then, let us delve into the main driving forces of recent inflation; the economists found that the inflation persisting into 2023 and 2024 could be traced back to the escalating conflicts between Russia and Ukraine. The sectoral demand shift also played an important role in increasing inflation. This means that the pandemic has shut down services like restaurants and changed people’s consumption habits: people worked remotely and purchased more durable goods instead of in-person services. The other factor is the higher profit markups. Companies were abusing their pricing power more than before. The abnormal monopoly and price cartel appeared among the big corporations (in the industries of oil, chemicals, logs, steels and proteins) in the U.S., pushing inflation higher and higher. Speculation activities in the financial market also contributed to higher prices, such as oil, cacao beans,and natural gas prices. Thus, more regulations on corporations’ activity and speculation and innovative policies from the central bank and government are called here.

Although the job market is definitely a player in the inflationary pressures experienced at Peter B’s or the local grocery store, there are more pieces to the puzzle that explain the high prices that hurt the wallets of Trinity students and all Americans. Our economic investigations have given us a clearer view of the various factors at play in the inflationary pressures that arose throughout the COVID-19 pandemic and beyond. For example, geopolitical pressures such as the war in Ukraine had a huge impact on the increased prices of oil, pushing higher costs onto farmers who produce our crops, forcing Americans to reach into their pockets for the extra few dollars needed to pay for their dinner at night. In tandem with the geopolitical pressures throughout the pandemic, there were also various supply chain blockages due to restrictions on the amount of cargo ship ports available, limiting the supply of imports, pushing demand higher for goods and leading to higher prices. 

So yes, although the labor market played a role in the high prices we faced during the pandemic, there are more players to blame. The high prices faced at Peter B’s or the grocery store are due to the melting pot of economic developments that created the perfect storm over the past few years, and it is important for policymakers to understand other metrics throwing the punches leading to high prices.

Ultimately, inflation is a challenging battle to face as a policymaker. Economic textbooks may be able to explain how to fight inflation in a perfect world… but we don’t live in a perfect world. We live in a world with unexpected complications that can arise out of nowhere and create a jumbled mess at our expense; COVID-19 is a prime example. So, the next time you go to Peter B’s and feel the pain of the soaring high prices, be sure to remember you can’t blame it solely on the job market! 

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