Rising wages do not cause inflation (“Raises for Job Switchers Heighten Inflation Risk”, Wall Street Journal, April 25, 2022, p. A1). Instead, rising wages are symptoms of rising inflation rates. When prices are—and people expect them to be—on an upward march, workers demand (and employers are willing to pay) higher cash wages in the attempt to maintain standards of living. To conclude otherwise is to confuse increases in the price of one good (labor) with an increase in the prices of all goods.
“Cost-push inflation” cannot be sustained without continuous increases in the money supply, which actually is responsible for today’s upward pricing pressures. Wages are price-determined, not price-determining. In a competitive labor market, the value of an employee to an employer depends on the value of the additional goods or services produced by that employee. The values of those goods and services are what customers are willing to pay for them. Put differently, the demand for labor is derived from the demand for the products labor produces.
Economists who argue that inflation is caused by higher wages essentially are restating a Marxian (and to be historically accurate, John Lockian or Adam Smithian) labor theory of value. The conclusion that prices depend only on the quantities of the labor inputs required to produce a good or service was exploded in the nineteenth century by the marginal revolution that located explanations for wages in workers’ productivities. Some, but not all, of the increases in the costs of any factor of production can be pushed forward to consumers in the form of higher prices, but in an inflationary environment, those cost increases may only be “nominal” and not signify changes in the price of one input relative to others.
Employees who change jobs for fatter paychecks are not to blame now or in the future for the rising prices that are predictable consequences of profligate monetary policies. Indeed, headline-making wage growth—4.5 percent, on average—was slower than the inflation rate (6.6 percent in consumer prices) during the first quarter of 2022 (“Pay and Benefits Soar in Tight Labor Market,” Wall Street Journal, April 30, 2022, p. A1).
So, real (inflation-adjusted) wages have been falling, precisely the opposite of the flawed cost-push “explanation” for rising prices.
This article was published by The Beacon