As it looks, many of the world’s advanced economies have emerged from the stupor of lockdowns with vigour and at frantic pace. Factory floors are humming, shops are raided and popular restaurants are booked out for months ahead. This move from standstill to full speed is creating hiccups. For more than a year, orders have been cancelled, inventories run down and investments frozen. Now, with demand booming, manufacturers and services are struggling to cope. Everyone wants everything at the same time: materials, components, energy and labour. As all these things are not forthcoming as swiftly as needed, manager-purchasing prices go through the roof and production is throttled by supply shortages. Impatient buyers, both producers as well as consumers, try to jump the queue by rampantly outbidding each other.
Both statistics as well as anecdotal evidence point at price jumps not experienced for many years. Crude oil recovered from being worthless in April last year to 71 USD per barrel, copper is as expensive as never before, prices for car rentals, houses, used cars, or flight tickets jump in double digits. Producers can charge at will as consumers seem prepared to accept any price on offer. Most alarming in this context is a broadly- asserted labour scarcity in combination with high unemployment figures. Restaurants scrambling for waiters and kitchen personnel pay finder’s fees, start-up bonuses and are willing to offer salaries generously higher than a year ago.
The fear of economists, monetary officials and market pundits is a so called ‘wage-price-spiral’ – a condition where prices keep increasing relentlessly and workers expect regular pay rises to compensate for it. We talk about inflation becoming ‘entrenched’ which ultimately means that buyers are keen to bring forward their purchases to avoid paying more for the same later – thereby accelerating inflation even more. Ultimately, such debasement of money can only be halted by raising interest rates, throttling money supply and forcing a crash on the economy. This ultimate remedy will impose steep losses on both share and bond investors.
Central banks and vigorously spending governments are refusing to acknowledge the risk of overheating the economy and continue to increase public expenditure as well as to provide liquidity unbridled. They consider the price pressures observed by all of us as ‘transitory’, meaning that once supply bottlenecks have eased, prices will normalise again. For the first time since the 1970s, employment measures take precedence before inflation considerations. This is alarming for monetary conservatives who fear that being hesitant to curb inflation now will demand much harsher and more destructive measures later. It is hard to tell who is right.
The economic standstill imposed by governmental fiat has even messed up the way how we measure price increases. The basket of goods observed by statisticians to gauge inflation has neither reflected our purchases during lockdown nor does it in any meaningful way exemplify what we are buying now as detention has eased. Yes, flight tickets are terribly expensive now, but where do we wish to fly to?
The crucible of the conundrum is the concurrency of heightened labour demand and still high unemployment. Conservatives fear that lavish pay cheques issued to people out of work and too generous unemployment support is discouraging people to return to work. They argue that labour will sit it out until ever more excessive payment demands are met. Workers will be in the driving seat until the whole economy is crashing against the wall. Inflation prophets assume labour pay to be the ultimate, all-decisive cost factor for producers. I find all this not plausible.
Labour will not be in a position to demand more pay for the same kind of jobs for long
First, there are many workers out there who missed out on furlough support. Then there are the many in precarious employment even before COVID struck: people on zero-hour contracts, the ‘self-employed’ in the gig economy, the cohorts living on minimum wages, the working poor. Their subsistence has hardly been buoyed by too generous unemployment support, allegedly wakening their bargaining power.
There may be open job positions everywhere, but this does not necessarily imply that people currently unemployed can fill them. People who have lost their jobs serving in pubs and restaurants have not only been poorly compensated by furlough schemes, as most of their income came from tax-free tips. They also had no time to wait for their old jobs to eventually become available again. They picked up other employment – in warehouses, in delivery or went on to qualify for something better. After all, there’s not much hope in a vocation that poorly pays for longer hours and which makes you jobless without pardon. Why would they come back now? Would a flight attendant made redundant jump in and juggle the pint glasses?
Many job openings can only be filled by foreigners who can arbitrage their low living costs at home for a meagre pay unacceptable to locals. Border restrictions and more stringent immigration requirements have put them out of reach. Harsh treatment during lockdown and alienation has convinced them that it is better to scrap by at home where they are socially accepted. Just because restaurants finally opening wish people to work for them again does not mean that candidates will rush to their help. Long hours confined at home have made many to realise that their aspirations will never be met by the jobs they were hanging on to by inertia. They want to see what the future looks like before they decide what trade to chose.
Workers have lost their bargaining power when labour was outsourced to low- cost countries like China and South East Asia. The disruption caused by the pandemic as well as growing geopolitical rivalry with China has put question marks on the viability and resilience of long supply chains and in-time delivery.
The lack of most essential hospital supplies has shown the limits of overly reliance on others. The lack of battery- manufacturing capabilities, industrial magnets, rare-earth metals or microprocessors at home suddenly looked like strategic disadvantages to be rectified. As a result, many jobs could migrate home again and indeed increase labour demand.
Looking at the precariousness of labour, higher salaries for once can’t be such a bad thing. After years of gains accumulated by capital at the expense of employees, it would only alleviate inequity. Higher pay will also stimulate productivity by boosting investment in automation, robotics and artificial intelligence. This will create new, better-paid jobs closer to home. Industry has relied far too long on underpaid hands.
To fear cohorts of the industrial proletariat demanding ever-higher pay for stubbornly low qualifications seems overdone. As enterprises rush to fully reopen, there will be a higher pay cheque for many. But labour will not be in a position to demand more pay for the same kind of jobs for long. To fear wages and prices ping-ponging out of control is overdone. Inflation may stay. But labour cost will not be its root cause.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com
Andreas Weitzer, Independent journalist based in Malta