Kuttner on TAP: Don’t Blame Wages for Inflation

The latest jobs report from the Labor Department, released Friday, was about everything one could want in a recovery. The unemployment rate fell again, to 3.8 percent, thanks to the creation of a prodigious 678,000 jobs in February.

Wage growth was 5.1 percent over a year ago. As Dean Baker points out, that is constructive and not inflationary. Coupled with a growth in the rate of productivity of 2.3 percent (the average of the last three years), this translates to an entirely sustainable wage-driven inflation rate of 2.7 percent. As the Prospect keeps reporting, the main sources of inflation are elsewhere.

Counting people who’ve left the labor force, there is still work to be done in restoring full employment. The total number of jobs in the economy is still about 2.1 million below pre-pandemic levels, or 2.3 million adjusting for population and age. Of those, 1.2 million reported that they were unable to work due to the pandemic.

Despite this excellent overall employment performance, the naysayers seem determined to look on the gloomy side and see wage and jobs progress as a case for austerity. Jason Furman, writing in The Wall Street Journal (at least he is in his natural home), contends that the increased production from these added workers will not make up for their increased consumption and more inflation will result.

As the estimable Dan Froomkin observes, the press in general seems determined to emphasize the negative. They have decided that Biden is a failure, thus employment successes are to be downplayed in favor of inflation risks.

One problem is that everyone experiences price increases, while only some workers experience wage gains or move to better jobs. But that is no reason to shift to austerity economics. We are only now getting some wage gains that workers have long been denied.

Inflation will be elevated for a time. But future inflation increases will be the result of wartime dislocations, not a bonanza to workers. Let’s attack inflation at its source—supply bottlenecks and corporate price-gouging—and not short-circuit an overdue recovery for ordinary working people.