Who benefits in the spiral of rising wages and rising prices?

 Who benefits in the spiral of rising wages and rising prices?

Inflation rose in many rich countries, leading to higher wages and prices. But neither companies raising prices nor workers getting a raise are unlikely to benefit.

Discontent is growing in some post-pandemic OECD economies. Households say companies are taking advantage of price increases, which have helped push the average inflation rate in rich countries to 6.6% over the past year.

Companies put these allegations aside and believe that they are the real losers. They complain employees are demanding ever higher wages. Earlier this month, Andrew Bailey, Governor of the Bank of England, caused controversy by suggesting that workers should moderate their wage demands - even if he has failed to ask You don't raise prices.

Collectively, economic output must go to the owners of capital, in the form of profits, dividends and rents; or for labor, in the form of wages, salaries and benefits. Economists call this the "capital" or "labor" share of GDP. In which, "capital" represents "money" of business owners, companies; and "labor" refers to the income of the worker.

A consumer pays for goods in Nice, France on April 3, 2019. Photo: Reuters

A consumer pays for goods in Nice, France on April 3, 2019. Photo: Reuters

Which side has the upper hand in the post-lockdown economy?

The Economist has compiled a series of indicators to answer this question. First, they calculate a high-frequency measure of the capital-labor ratio across 30 predominantly affluent, OECD countries. In 2020, the total "labor" share of this group has skyrocketed. This is largely because companies continue to pay people - thanks to government stimulus programs - even as GDP falls. In short, the advantage at this stage belongs to the workers.

More recently, however, the battle has turned in favor of the "capital" side. Since peaking in 2020, the share of "labor" in the rich world group has fallen by 2.3 percentage points. However, the data is only for September 2021, and most economists argue that the share of "labor" is not a perfect measure of economic justice, as it is difficult to measure. Evidence since then shows that countries fall into one of three groups.

The first group is England. Here, basic wage growth sits at 5% a year, unusually fast by rich-country standards. But corporations have little to no pricing power. That means they are struggling to compensate for the higher cost by raising prices higher.

The estimated nominal profit in pounds per unit of goods and services sold is roughly the same as it was in the first half of 2019, even as labor costs are rising by around 3% per year, according to the study. "Labour" seems to be winning over "capital".

The second group includes most other wealthy nations outside of the Americas. There, both "labor" and "capital" can barely win. After overcoming the effects of the pandemic, Japan's wage growth is slowing to less than 1% a year, according to data from Goldman Sachs.

Wage growth in Italy and Spain is slowing, while wage growth in Australia, France and Germany remains far below pre-pandemic levels. So workers in these places aren't really the source of inflation.