Thread by @jasonfurman

Great question. One view is that wage-price spirals were possible because unions had the power to negotiate contracts with cost-of-living adjustments. Under this view, the decline of unions and escalator contracts will mean a different dynamic.

I personally doubt it. Here's why:

https://twitter.com/MaxJerneck/status/1493137829643399172

Take an ice cream shop. They don't want to pay their workers more. Their workers don't have COLAs. But their workers are threatening to leave for jobs at Chipotle. Chipotle can afford to pay more because it raised prices. The ice cream shop has not choice but to pay more too.

And the ice cream shop will raise prices to be able to afford to pay more. Customers will still buy stuff there because prices are higher elsewhere too so the ice cream shop's relative prices haven't increased.

Etc. Etc. Etc.

Thinking more abstractly and assuming a competitive labor market: Imagine labor demand as a function of nominal wages. If prices rise then the labor demand curve shifts out. The business wants to hire more people because it can sell stuff at higher prices.

Also, labor supply may shift in for the same reason (at any given nominal wage people want to work less when prices are higher because their real wage is lower).

The result of more demand less supply is higher nominal wages--just enough to keep real wages unchanged.

That was the competitive case. I think that bargaining, institutional factors, monopsony, etc. all matter. But for similar reasons, the solution to all of those is in real wage space--so if prices go up nominal wage should go up.

What is the evidence for this? Countries with 15 percent inflation tend to have nominal wages that grow 10 percentage points faster than countries with 5 percent inflation. You don't generally observe much worse real wage growth over sustained periods of higher inflation. Etc.

We didn't have the power to test whether or not this was true in data over the last thirty years because there has been little variation in core inflation. (Yes, food/energy volatile but those tend to be transitory and don't operate like the prices increases described above.)

Note, if this is wrong that creates a bizarre situation. Will real wages be 5 percent lower for the rest of time because of the excess 5 percentage points of inflation in 2021? If you think that then you really, really, really want to avoid surprise inflation.

So I think it is very likely that wage growth will feed into price growth and price growth will feed into wage growth. This need not be a spiral of 5 to 6 to 8 to 12 to 20, it may be dampened or even reduced. But the pressure is very much there.

FIN