Rising wages are doing more good than bad, Fed’s Powell says

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  • Rising wages aren’t contributing to decade-high inflation, Fed Chair Jerome Powell said Wednesday.
  • Today’s trend is different and healthier than the wage-price spiral of the 1970s, he added.
  • The comments echo remarks from President Joe Biden, who’s repeatedly praised the jump in worker pay.
  • See more stories on Insider’s business page.

Wages are rising, but not to a degree that should concern economists, Federal Reserve Chair Jerome Powell said Wednesday.

The months-long labor shortage has prompted some businesses to raise wages as they scramble to rehire. Average hourly earnings rose at an unusually fast pace through spring, and healthy job creation in sectors with the largest pay bumps suggests the raises are working.

Yet the increases have raised some concerns around how higher pay might boost inflation. Price growth hit the fastest pace since April 2008 last month, reflecting dire supply shortages and overwhelming demand in the US economy. Higher pay could further accelerate inflation by lifting consumer spending and leading companies to charge more.

Such a process can occur, but it’s not what the economy is experiencing today, Powell said in a press conference following the Federal Open Market Committee’s July meeting. The US faced a wage-price spiral in the Great Inflation of the 1970s as companies used higher prices to offset rising labor costs. Since wages have steadily risen alongside broader price growth, the current trend is more healthy than concerning, the Fed chair said.

“Wages moving across the spectrum consistent with inflation and productivity is a good thing,” he added.

The FOMC elected to hold interest rates near zero and maintain asset purchases of at least $120 billion per month. Powell hinted that participants discussed plans to taper the purchases, but gave little indication of when action would take place.

To be sure, the jump in wages is easily outpaced by the inflation uptick. On net, average pay has declined due to broadly higher prices. Minimum wage workers who haven’t benefitted from the jump are the poorest they’ve been in decades.

Economists also expect the leap in wages to be a one-off. It’s unlikely businesses will factor higher inflation into their wage-setting plans for next year, Gregory Daco, chief US economist at Oxford Economics, said in June. The increase is more a “one-time releveling of low wages” than a permanent shift in workers’ bargaining power, he added.

That hasn’t stopped policymakers from cheering the gains so far. Labor Secretary Marty Walsh said earlier in July that the administration isn’t worried at all about higher pay adding to inflation.

“I think steady wage growth is good for workers. The one thing that we are not concerned about is … inflation,” Walsh told Insider. “We’re still in transition, so we’re not concerned about that. So I think anytime we can push for higher wages – and the president’s been very vocal on this – that’s a good thing for people.”

President Joe Biden made similar remarks in June, saying employers should simply “pay [workers] more!” if they were struggling with the labor shortage. The pay hikes are a result of employees having a stronger bargaining chip now, he added.

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Rising wages are a ‘feature,’ not a bug, of the post-pandemic economy, President Biden says

Biden economy speech Cleveland Ohio
U.S. President Joe Biden delivers remarks on the economy during a visit to Cuyahoga Community College in Cleveland, Ohio, U.S., May 27, 2021.

  • Wage hikes at large-scale employers are an encouraging sign for the economic recovery, Pres. Biden said on Thursday.
  • The increases are a sign workers are gaining bargaining power for the first time in decades, he added.
  • Biden noted there’s “more than ample room” to raise wages without driving inflation higher.
  • See more stories on Insider’s business page.

The wage hikes seen in recent weeks offer an encouraging hint of what the new US economy can look like, President Joe Biden said Thursday.

Large-scale employers have been raising their minimum wages as they look to attract workers through reopening. Companies such as McDonald’s, Amazon, and Under Armour have rolled out higher starting wages through May. The hikes appear to be in response to unexpected tightness in the labor market.

While millions of Americans remain unemployed, those on the sidelines are holding out for higher compensation before rejoining the workforce.

Republicans have blamed bolstered unemployment benefits for the labor shortage, saying they disincentivize jobless Americans from seeking work. Biden, however, sees a more encouraging trend behind the wage hikes. The raises “aren’t a bug” but “a feature” of the post-pandemic economy and show that workers are finally regaining bargaining power, the president said.

“Instead of workers competing for each other for jobs that are scarce, we want employers to compete with each other to attract workers,” Biden told a crowd in Cleveland, Ohio.

He continued: “That kind of competition in the market doesn’t just give workers more ability to earn a higher wage, it gives them the power and demand to be treated with dignity and respect in the workplace.”

Critics of the recent wage hikes have also deemed them a symptom of rampant inflation that could spark a new economic crisis. Stronger inflation typically does translate to higher pay, as workers demand greater compensation to counter rising prices.

Biden instead linked the raises to a reversal in long-stagnant wage growth. Worker salaries and wages have made up a smaller and smaller share of US economic output since the 1960s. At the same time, compensation for CEOs and shareholders has boomed.

Boosting compensation for workers at the bottom of the pay scale is long overdue and poses little risk to the recovery, the president said Thursday.

“We have more than ample room to raise workers’ pay without raising customer prices,” Biden added.

While several companies have announced their own wage hikes, the latest efforts to introduce a higher minimum wage at the federal level have so far failed. The Senate voted down an amendment to raise the federal wage floor in March, and lawmakers haven’t made substantial progress toward such a hike since. And with eight Democrats defecting from the party and voting against the proposal, such legislation faces an uphill climb at least until the 2022 midterms.

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Bernie Sanders says Democrats will try to devise a backdoor to implement a $15 minimum wage after major stimulus setback

Bernie Sanders
Sen. Bernie Sanders, I-Vt., talks during an interview with MSNBC in the Russell Rotunda in Washington on Wednesday, Dec. 16, 2020.

  • A federal minimum wage hike was struck from the stimulus package on Thursday.
  • Sen. Bernie Sanders said Democrats instead will propose to strip tax deductions from large corporations who don’t pay workers at least $15 an hour.
  • He also said they would provide incentives to small businesses so that they can raise wages.
  • Visit the Business section of Insider for more stories.

Sen. Bernie Sanders said Democrats would try to devise a backdoor to implement a $15 minimum wage after a pay hike was struck from the $1.9 trillion stimulus package on Thursday evening – a major setback for progressives.

Senate parliamentarian Elizabeth McDonough ruled that a $15 minimum wage violated the strict guidelines of the reconciliation process. It’s the legislative method Democrats are using to approve the package in a party-line vote without Republican support.

In a statement, Sanders criticized McDonough’s decision. “It is hard for me to understand how drilling for oil in the Arctic National Wildlife Refuge was compliant with the Byrd rule, but raising the minimum wage is not,” the Vermont Democrat said, referring to a part of the 2017 GOP tax law allowed through reconciliation.

Then he said he will work with other Senate Democrats on “an amendment to take tax deductions away from large, profitable corporations that don’t pay workers at least $15 an hour and to provide small businesses with the incentives they need to raise wages.”

There were early signs of Democratic support for the move on Thursday evening. Sen. Brian Schatz of Hawaii tweeted “COUNT ME IN” on the Sanders proposal.

Sen. Ron Wyden of Oregon, chair of the tax-writing Senate Finance Committee, also said in a statement: “I’m looking at a tax penalty for mega-corporations that refuse to pay a living wage.”

Democrats are rushing to approve the emergency spending package ahead of March 14, the deadline when enhanced unemployment insurance starts to expire.

Yet designing and gathering support for a new plan to raise wages could complicate the swift timeline Democrats are pursuing. Some centrist Democrats may be reluctant to raise taxes on large corporations during the economic downturn.

It’s also unclear whether the proposal would be supported by Sen. Joe Manchin, a key West Virginia Democrat. The provision would also have to clear the reconciliation process governed by the parliamentarian.

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