#13   The “wage-price spiral” is pure, full-fat,  24-carat BS. Even the IMF says so.

image- Gerd Altmann, via Pixabay.com

Like a lot of popular myths about economics, the “wage-price-spiral” sounds so convincing. “Wage demands cause wages to rise, so suppliers have to put their prices up, so workers demand higher wages. So inflation runs riot, everyone suffers.”

Seems like common-sense? Well, it isn’t. It’s an outstanding example of the old Army saying, “bullshit baffles brains”. And, common-sense is all very well when crossing the road or dealing with scam emails, but it’s a lousy guide to macroeconomics.

Who’s talking about it? Here’s Andrew Bailey , reported talking to BBC’s R4, trying to justify the latest Bank Rate rise. You’d think, wouldn’t you, that the Governor of the Bank of England would know a thing or two about how the economy works?  Highly educated fella, years of experience in that field, with a large staff of technical experts to supply him with data and analysis.

“Andrew Bailey told The Today Programme that policy makers must act to prevent a wage-price spiral from fuelling inflation, which is growing at its quickest pace in four decades and forecast to leap above 13% later this year.”

And: ““I’m not saying nobody gets a pay rise, don’t get me wrong. But what I am saying is, we do need to see restraint in pay bargaining, otherwise it will get out of control”.

But, when we look a little deeper into this, the picture looks very different.  (For this post, I am indebted to “The wage-price spiral refuted” from Michael Roberts’ blog, November 2022. You can read it here with a link to the full IMF study).

The International Monetary Fund (IMF) has just published a study, a comprehensive data analysis, which examined episodes of wage and price rises in several countries since the 1960s. They were looking to see whether wage-price “spirals” did actually occur. And the answer is, usually not. Nein, Niet, Nej, not on your nelly.  (And the IMF are the instrument of international financial orthodoxy, not some left-wing tribune!)

From the IMF conclusions:

“Wage-price spirals, at least defined as a sustained acceleration of prices and wages, are hard to find in the recent historical record.

Moreover, sustained wage-price acceleration is even harder to find when looking at episodes similar to today, where real wages have significantly fallen. In those cases, nominal wages tended to catch-up to inflation to partially recover real wage losses,

When focusing on episodes that mimic the recent pattern of falling real wages and tightening labor markets, declining inflation and nominal wage growth increases tended to follow – thus allowing real wages to catch up.

Michael Roberts:  “What does the IMF conclude?  “We conclude that an acceleration of nominal wages should not necessarily be seen as a sign that a wage-price spiral is taking hold.” In inflationary episodes, wages just try to catch up with prices.  But even then, wage rises do not cause wage price spirals”

He’s saying that when, as now, a load of prices rise rapidly owing to external and supply shocks-(shortages of transport, labour, materials,  manufacturing capacity post-pandemic/ sanctions and export restrictions following the war in Ukraine) ,  then wages are not leading the price rises, but trying to catch up. The establishment likes to pretend that “excessive, greedy wage demands” are forcing wages up- but in reality, it’s workers (whose wages have mainly been held down since the GFC of 2009 or actually fallen) seeking to defend their standard of living, rarely improving it.

Michael Roberts again:  “Despite this evidence refuting the wage-price spiral, mainstream economists and the official authorities continue to claim that this is the key risk to sustained inflation.  The reason for doing so is not really because the economic prize-fighters for capitalism believe that wage rises cause inflation. 

 It is because they want ‘wage restraint’ in the face of spiralling inflation in order to protect and sustain profits.  To this aim they support central bank interest rate hikes that will accelerate economies into a slump – coming in the next year.”

Now, we begin to see what’s going on here. If wages go up across the board, profits fall. So workers rather than companies are taking the bigger hit from inflation. So, “economists and the official authorities” –e.g. Andrew Bailey and the Monetary Policy Committee of the Bank of England- are leading us up the garden path. Why might they be doing that? Probably steered by HM Treasury/Government?

Michael Roberts again: “So the real aim of interest-rate hikes is not to stop a wage-price spiral but to raise unemployment and weaken the bargaining power of labour. “

He quotes Financial Times eminent columnist Martin Wolf: “Monetary policy must be tight enough to achieve this. In other words, it must create/preserve some slack in the labour market.” Translation– pushing up interest rates, which causes or deepens a recession in conjunction with government spending cuts, will cause increased unemployment, which will kill off wage demands. If workers fear for their jobs, they will reluctantly accept low wages and keep on struggling to survive. All this is in the context just now, of what the authorities call a “tight labour market”. (Post-pandemic, many older workers have left the job market, and Brexit combined with the pandemic has severely limited the availability of workers from abroad to fill the gap).

 Profits are largely preserved, and for those companies supplying the essentials-gas, electricity, food, transport- they are in some cases driven up substantially.

This is not something new.  Roberts quotes Alan Budd, who was chief economic advisor to Margaret Thatcher in the 1980s: ““There may have been people making the actual policy decisions… who never believed for a moment that this was the correct way to bring down inflation. They did, however, see that [monetarism] would be a very, very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes.”  (“Monetarism” here means the myth that money is in short supply, and that government spending must be cut- this is not true for the UK, which has had the ability to issue pounds sterling as required by order to the Bank of England ever since the scrapping of the Gold Standard in 1973).

In summary: the “wage-price spiral” is a myth, and it’s being used to force wages down. After 12 years of stagnant growth, or falling in real terms .  As Richard Murphy shows here.

I am grateful to Ian Tresman of MMT.works for editing suggestions.

Further reading:  This Yahoo News report from August 2022 is good, and has some useful graphs and videos.

We cannot afford to not give inflation matching pay riseshttps://www.taxresearch.org.uk/Blog/2022/12/06/we-cannot-afford-to-not-give-inflation-matching-pay-rises/

Published by adeibanez

My eyes were opened to the modern understanding of how governments and money work a few years ago, and since then I have been taking every opportunity to learn more. This includes what is usually known as Modern Monetary Theory (MMT), but relates to the tradition of Political Economy, which considers the effect of political policy on wealth distribution. And, what history has to tell us. In short, why some in society get the least. I do not claim to be any kind of qualified economist, but my blog is an attempt to explain this modern understanding to non-economists, and there are links to very well qualified writers, for those who want to learn more. I hope you will too. I am retired, and this blog is entirely non-commercial and non-profit-making. It is for educational and campaigning purposes only.

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