***Wage inflation causes SUSTAINED INFLATION resulting in risky investments that risk economic disruption

(Carl Zulauf Department of Agricultural, Environmental and Development Economics Ohio State University Gary Schnitkey, Nick Paulson, and Krista Swanson Department of Agricultural and Consumer Economics University of Illinois, “US Labor Market and Labor Wage Inflation,” farmdoc daily (12):1, pg online @ https://farmdocdaily.illinois.edu/2022/01/us-labor-market-and-labor-wage-inflation.html //um-ef)

This article presents evidence that (a) US labor force participation has been declining in the 21st Century and (b) lower labor force participation has historically been associated with higher hourly earnings. Some, perhaps a notable part, of the 21st Century decline in US labor force participation may be due to retiring Baby Boomers having a greater propensity to work than succeeding generations. If so, employers will need to raise wages to attract more workers. Moreover, the Federal infrastructure bill creates new jobs, likely adding to labor wage inflation. The proposed “Build Back Better” bill also contains programs that creates new jobs, for example early childhood educators. The preceding points imply a key question, “Is labor wage inflation an emerging US issue?” Many factors that impact inflation are transitory in nature, such as reductions in crop output due to weather and higher energy prices due to a weather-related surge in demand or reduction in supply. The distinction between transitory and on-going inflation is why economists often remove farm, food, and energy prices to calculate what is called the core inflation rate. However, it is important to note that farm, food, and energy prices can contribute to on-going inflation, especially if demand is growing faster than supply. Labor wage inflation is less likely to be transitory and more likely to be sustained, especially if the cause is a structural change in labor supply or demand. Declining labor force participation is a structural change in labor supply. Labor wage inflation often translates into higher general inflation. Workers have more income to spend which translates into more demand. Assuming all else remains the same, higher demand means higher prices for goods and services. If expectations for continuing inflation takes hold, often called inflation psychology; inflationary pressures mount further as consumers buy now to avoid paying higher prices in the future. Moreover, over the last two years, the inflation adjusted 10-year US Treasury Bond interest rate has been negative (December 22, 2021 farmdoc daily). The combination of inflation and negative real interest rates discourages investment in interest rate instruments such as bank CDs since earned interest will not cover inflation price increases. It is reasonable to assume that some, maybe a lot, of money in this safe investment will move to riskier investments, such as stocks and real estate. Once inflation takes hold, it is difficult to cure. For example, when the US finally decided to cure its inflation problem in the late 1970s, it took a sustained period of high real interest rates to cure it. High Federal outlays for interest on US debt materially constrained US policy and spending, and real estate investments, such as farmland, and stocks struggled with low returns and declining values. Another potential solution to inflation is new technology that improves labor productivity, such as robots.. Faster growth in output increases supply, thus dampening general price inflation. However, the history of US labor productivity as presented in Figure 2 prompts caution regarding this option. Another solution is increased immigration to increase US labor supply, but political discord prompts caution regarding the feasibility of this option at this time. In closing, it is too early to know if sustained higher inflation, in particular labor wage led inflation, is an emerging, on-going US problem. If it is an emerging, on-going problem; it may take several years before the US decides to act or is forced to act by markets. Nevertheless, it is not too early to track labor wage inflation as an early warning signal.