Wednesday, March 30, 2011

Wages and Inflation

Those who see no inflation in our future usually rest their argument on slow wage growth. The argument is that if wage rates don't increase, then there is nothing to pass on in the form of higher prices. Would that it were so?

The real issue is not whether wages are rising. The real issue is whether or not labor costs are rising. Wages are only one component of the cost of labor to business and wages represent a declining portion of that cost. Ask Walmart.

As Walmart faces a potential multi-billion lawsuit, companies around the US brace themselves for massive copy-cat employee lawsuits. All large companies now have to factor in dramatically higher potential liability costs associated with the Walmart lawsuit. Don't believe that companies aren't watching the developments in the Walmart case -- they are.

As for Walmart, you can be sure that they will make every effort, over time, to pass their litigation costs on to their labor force. But, in the short run, the cost of labor at Walmart has just risen dramatically, while wages have gone nowhere.

Lawyers are the big winners here. The losers are folks looking for a job or looking for a wage increase. Even if wages decline, there will be substantially higher labor costs ahead thanks to government efforts to "protect" employees. All of these protection mechanisms are costly and will be passed on to consumers in the form of higher prices.

The issue is not whether wages are rising. The issue is whether labor costs are rising. The answer is that labor costs are rising and rising at an incredible pace. Hence, higher prices.

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