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Wage pressures become inflationary flashpoint in developed economies

From striking refuse collectors in Brighton on England’s south coast to the thousands of employees who have walked out at US tractor maker John Deere, wage disputes are becoming a flashpoint for investors and policymakers as developed economies recover from the pandemic.

Emboldened by staff shortages, rising energy prices and living costs, employees are increasingly butting heads with their employers over salaries. One of Germany’s biggest trade unions this month asked for an inflation-busting 5.3 per cent pay rise.

Some worry growing wage pressures could unleash a 1970s-style inflationary spiral that prompts interest rate increases that undercut frothy stock markets. As the IMF warned last week, central banks need to be “very, very vigilant” of rising energy and other costs feeding into higher wages and core prices.

Others see it as an overdue boost to stagnant wages, and a rebalancing of income towards labour after years of rising asset prices and high returns to capital. Japan’s prime minister Fumio Kishida, who is seeking re-election this month, has even promised tax breaks to companies that raise staff pay.

“Human capital has simply become a little more expensive,” said Carsten Brzeski, chief economist at ING, who argues that as baby-boomers retire and companies reshore supply chains, wage pressures already building before the pandemic will grow more intense.

So far, though, evidence of rising wages is mixed, at best. Even in countries where pressures are building, wages may not be rising at all after taking into account inflation — or at least not yet.

The clearest pressures are in the US. Consumer spending is strong, but the workforce stands at about 4m less than its 165m level before the pandemic, and average hourly earnings are rising at a 4.5 per cent annual clip.

“Businesses are going to need the labour force to meet that demand and if [workers] don’t come back then we will see more wage growth,” said Alan Detmeister, an economist at UBS and a former staff member at the US Federal Reserve.

Chart showing US wages are now rising as companies seek to attract staff; three-month moving average of median wage growth (hourly data, %)

Even so, most pay gains are concentrated in low-wage sectors. Amazon’s decision to pay warehouse staff an hourly $18 minimum, for example, prompted other big employers to raise starting pay.

Furthermore, wage growth has only outpaced consumer price inflation, at present running higher than 5 per cent, for two months. Over the past year, wages have fallen in real terms. US wage growth so far remains “within normal ranges”, the IMF said last month.

In the UK wage pressures are also building, with a nationwide shortage of truck drivers merely the most visible example of staff shortages stretching from food supply chains to film crews.

The Bank of England believes average earnings growth of about 4 per cent has passed its pre-pandemic level, while business surveys point to more employers raising pay to attract staff. Yet, as in the US, wage gains appear to be concentrated in low-paid sectors — especially for logistics and hospitality staff ahead of the Christmas rush.

Elsewhere in the world, wage pressures remain muted, even in sectors where employers are struggling to hire staff.

In Australia, staff vacancies are growing at a faster rate than in the US, UK or Canada, according to real-time data from jobs site Indeed. Yet the central bank concluded at its October meeting that wage growth remained “modest”, with shortages having no effect on companies’ plans to raise pay.

In Japan, wages also continue to resist a tight labour market. For 30 years, they have remained almost flat and, on the latest August data, rose just 0.2 per cent in real terms over the past year. Despite Kishida’s pledge to boost wages, analysts are sceptical much will change in a country gripped by near permanent deflation.

As for the eurozone, there are few signs of surging wages, even though unemployment has fallen back to pre-pandemic lows and the number of people on state job support schemes has dropped sharply.

IG Bau, Germany’s main construction trade union, may have pitched this month for a 5.3 per cent pay rise for 890,000 of its workers. But in the end, it agreed a pay increase of 3.3 per cent next year and 2 per cent in 2023.

Dirk Schumacher, head of European macro research at Natixis, said this “moderate deal” signalled the union was “not concerned that inflation will get out of hand over the duration of the agreement”.

Five of the country’s top economic institutes agree. Despite German inflation hitting a 29-year high of 4.1 per cent in September, they do not see it triggering a burst in wage demands. They forecast last week that growth in German labour costs would drop from 3.4 per cent last year to 0.8 per cent this year and zero in 2023.

Even so, the US and UK central banks are watching carefully. Andrew Bailey, the Bank of England governor, said last month it was “crucial” to distinguish between whether the UK was experiencing a one-off change in prices and wages, or “a persistent increase in the rate of change”. Similarly, the US Federal Reserve warned at its last meeting that supply and staff shortages might have “persistent effects” on prices and wages.

By contrast, the European Central Bank seems more relaxed. Philip Lane, the ECB’s chief economist, said this month that “a one-off shift in the level of wages . . . does not imply a trend shift in the path of underlying inflation”.

Wage gains would even be welcome for eurozone policymakers, ING’s Brzeski said, as that would offset the hit to disposable incomes from higher living costs. But it was “completely unrealistic” for pay increases to match inflation, he added, “at least not this year”.

Additional reporting by Martin Arnold in Frankfurt, Colby Smith in Washington and Kana Inagaki in Tokyo

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