Last week, I provided a chart in this blog post – The Left/Right distinction is as important as ever, as companies squeeze profits from pushing inflation (2 May 2022) – This shows that negotiated wage growth in Europe is declining, while actual negotiated wages have fallen sharply over the past few months. I’ve been looking for evidence that the current inflation event, no matter how worrisome, is not driven by structural forces in the labor market, despite the drop in unemployment. Next is the piece of music.
Salary Outlook in Europe
ECB Executive Board member Philip Lane presented an interesting chart in his speech on May 5, 2022 – Eurozone Outlook: Some Analytical Considerations.
The ECB is a central bank that has not pursued knee-jerk rate hikes, which increasingly marks a re-implementation of the old NAIRU mentality that I had hoped to be abandoned.
So I watch what their officials say and write, because every nuance provides information about what they might be doing.
Philip Lane has identified three major challenges to the “Euro Area Economic and Inflation Outlook”.
1. The ongoing pandemic – the “primary driver.”
2. “The surge in energy prices…represents a major macroeconomic shock” – importantly, he correctly points out, “ultimately a horizontal effect” and not necessarily a persistent source of inflationary pressures.
Rising energy price levels are actually a process of redistribution – shifting revenue to oil companies and their shareholders at the expense of the rest of us.
If oil prices keep rising, it can only drive higher inflation, and the major global recession that ensues will end that anyway.
3. “Russian invasion of Ukraine” – amplifies the “energy shock”, creates new supply bottlenecks and depresses “consumer and business confidence”.
Taken together, these factors create an inflationary impulse on the nominal aggregate and a recessionary effect on the real aggregate (output).
Of course, this is a formidable duo.
Europe would be much worse off without government spending.
“Consumption and investment remain below pre-pandemic levels, while government spending (public consumption and public investment combined) has been substantially above pre-pandemic levels since the second half of 2020,” Philip Lane said.
We use words in different ways.
For Lane, government consumption and investment spending are about 5.5 percentage points above their December 2019 quarter levels, and in my view, this is a relatively modest fiscal response given the conditions faced in early 2020.
Private consumption was about 4 percentage points lower than in the December 2019 quarter, and private capital formation (investment) was about 10.2 percentage points lower than in 2019.
So it’s no wonder that real GDP is still below pre-pandemic levels, which tells me that fiscal intervention is too weak.
He also suggested that these factors were killing new manufacturing orders and export demand in Europe.
This is a contagion effect caused by an initial supply disruption, which then plays out through the supply chain.
One factory stops production or is unable to deliver material to another process downstream, and disruptions multiply.
Then OPEC oil curbs pushing up energy prices have spread across the industry landscape.
It is always difficult to avoid inflationary impulses in such a situation.
Philip Lane does acknowledge the ephemeral nature of these impulses:
Bottlenecks can also create temporary upward pressure on costs, even though eventual resolution of those bottlenecks should reverse those cost pressures in the future…
To the extent that the increase in energy costs is ultimately a horizontal effect, the bottleneck is finally resolved, suggesting a temporary component to the current commodity inflation rate.
That’s why I stand by my position that current inflation, no matter how difficult it is for low-income households to deal with, is temporary in nature.
I repeat, some commentators, including ABC Finance Twitter users, don’t seem to get much.
Ephemeral does not necessarily mean ephemeral. That means as long as the extraordinary driver is driving.
The next part of his analysis reinforces this point.
He presents this interesting graph (Figure 8), which is “the development of nominal wages, including information embedded in an experimental forward-looking wage tracker developed by ECB staff”.
This is a very convincing chart.
Since the beginning of 2019, changes in wages have continued into the second half of 2021.
After that there was a very mild rise.
Using a forward tracker that takes into account “micro data on wage agreements in Germany, Italy, Spain and the Netherlands”, the predicted trajectory will flatten out, well below pre-pandemic growth rates.
This growth rate is not seen as problematic.
The prospect now is for wages to grow even slower than that.
Philip Lane concludes:
The overall tracker shows that aggregate wage growth is only moving laterally at around 2% per annum… When assessing wage development, under typical conditions and allowing for labor productivity growth of around 1%, nominal wage growth of 3% versus 2% inflation Goals are the same.
That’s why the ECB isn’t joining in pushing rates higher.
They clearly understand the factors driving inflation better than other economists who have called for rate hikes in advance.
He also indicated that “market” estimates of inflation expectations point to a stable inflation rate converging around 2% over the medium term.
He concluded that:
For these reasons, our policy calibration will remain data-dependent and reflect our evolving assessment of the outlook.
Evidence is not ideology.
A good thing in this case.
Fast Track to Australian Elections
Yesterday the Labour Opposition Leader was still in a good position to win the 21 May 2022 federal election from one of the worst Conservative governments we have had to endure here, but he was forced to do something about the federal minimum wage what if he wins the government.
Every year, the Fair Work Commission makes a judicial judgment on minimum wage levels for the next 12 months and hears from all relevant parties, including the state and federal government.
Conservative governments don’t make comments based on percentage changes, and typically go with the case for modest wage increases made by business lobbies, which typically advocate small increases.
I saw the CEO of the Chamber of Commerce on the morning show earlier today and the presenter asked him if there should be a minimum increase of 5.1% (current inflation rate), which the ACTU submitted to the Fair Work Commission.
He said no, a maximum of 3% was reasonable.
The host went on to say – so you think it’s reasonable to cut down on the real purchasing power of Australia’s minimum wage workers – many people in cleaning and healthcare jobs, which has saved us during the pandemic.
He replied that this did not reduce the real standard of living.
That is, boldly speaking, black is white.
The current government declined to say what the July increase should be.
But the Opposition Leader told reporters yesterday that he supported the ACTU’s position that the minimum wage should not lag the rate of inflation.
Well, the amount of abuse he’s received from the federal government – “destroying the economy,” “killing jobs,” etc. can only be matched by the input of economists and their mates in the corporate lobby, they claim Businesses can’t afford it, and they end up having to lay off staff.
The common question these troopers ask the uninformed populace is – no matter which way we go, things are going to be bad, but it’s better to keep working for us, on poverty pay rather than pay rises and unemployment.
Except, every time a salary hike is mentioned, the company is breaking up this little game.
In the early days of the pandemic, Australia’s wage share (as a share of national income) fell below 50 per cent for the first time since 1959.
Of course, this means a further increase in the profit share.
In the National Accounts report for the June 2020 quarter, we observed that company profits rose by an unprecedented 14.9% in the quarter, while total wages paid to workers fell by a record 2.5%.
Part of the reason for the surge in profits is financial support from the federal government. It shows that, when designing fiscal interventions, governments must ensure that they do not simply shift revenue to the corporate sector at the expense of the rest of us.
The situation for workers has not improved since then.
Corporate earnings in Australia are at record levels – 10% higher in 2022 than in 2019
Corporate profits are also booming.
Just yesterday, we learned that the big four banks’ profits for the first half of 2022 were around A$14.4 billion, up 5.1 per cent from the previous year.
Energy companies are “rolling” profits.
Russia’s invasion of Ukraine “has brought ‘windfalls’ to Australian companies selling iron ore, gas and base metals” – huge profits. (source)
The latest ABS data – Business Indicators, Australia – Shows an overall 13% increase in corporate profits for the year ending December 2021.
That is, a huge real gain in corporate profits.
So the question is, why are Australia’s lowest paid workers putting up with real wage cuts when the companies they work for are growing by leaps and bounds?
When corporate profits are skyrocketing, companies are unable to pay higher wages (growth rates are at record lows), what do we explain?
It doesn’t make any sense at all.
Music – Lester Young Trio
This is what I’ve been listening to today at work.
It was played by one of the greatest tenors— Lester Young – I played Hoagy Carmichael’s Stardust in 1952 a few weeks ago.
Yesterday I was talking to another saxophonist about the technical evolution from Coleman Hawkins to Lester Young, so this morning I took the album from 19
He is also a mentor – Charles Christopher Parker Jr. – which means he played very well.
This song is the number of George and Ella Gershwin- man i love – Published in 1955 – Lester Young Trio (The cover is from the 1946 Hollywood Records reissue by Verve Records in 1994).
The loud sound that Lester Young played was really another story.
The trio includes 3 of the greatest jazz players of all time:
1. Lester Young – Tenor saxophone
2. Nat Kincole – piano
3. buddy rich – drum
Enough for today!
(c) Copyright 2022 William Mitchell. all rights reserved.
