Comment by Closi | Hacker News Reader

Comment by Closi | Hacker News Reader

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I mean it seems fairly econ 101 in some respects:

* Companies have normal profitability in the long run in a competitive market.

* If costs go up, companies must raise prices to maintain normal profitability.

* If wages increase, costs go up.

Here is the paper I assume is referenced in this article: https://www.google.co.uk/books/edition/Wage_Growth_and_Infla...

But the blog article says: "The Economist piece appears to have repeated the old theory that wage growth causes inflation spirals. As discussed, empirical evidence shows this is not true"

I don't think many economists would argue that wage inflation causes no price inflation, and that also doesn't seem to be the finding of the paper they are referring to - which finds that wages CAN create inflation. The debate is about the amount of passthrough (e.g. how much an increase in wages affects an increase in the price of goods).

Then the blog article says:

> there is evidence that it is elevated inflation that causes wage increases.

But that can be true while the opposite is also true. Inflation can cause wage increases. Wage increases can increase costs. Increasing costs can lead to price increases. Price increases cause inflation. Inflation can cause wage increases. Each step in diminishing quantities, but still multiplying the initial effect of inflation.

I think this article is very cherry-picky of the facts.

Hi! Author here. This was actually my second article on wages and inflation (the first one can be found on my site - Dec 4, 2022 - Wages and Inflation). The main theoretical work behind this actually work done by Oliver Blanchard (1985). From that post: "Another influential paper was Blanchard (1985). In this paper, Blanchard argued that in a setting where an increase in overall demand reduces unemployment, firms will have to compete for workers by offering higher wages, which will force them to increase their desired mark-up, pushing up prices of goods. With higher prices of goods, real wages of workers (i.e. the actual amount of goods workers can buy) fall, thus pushing them to demand higher wages. In a staggered negotiation situation, where these negotiations happen repeatedly (i.e. month-to-month) rather than in a world where wages and prices adjust immediately, inflation can persist for a long time.

Due to the simplicity and logical appeal of this theory, it has been heavily tested empirically. Most empirical studies to date suggest, however, that wages do not cause1 inflation. Schwerzer and Hess (2000) from the Cleveland Federal Reserve did an overview of the economic research at the time and found very little evidence supporting the idea that wages cause inflation. Only one study showed a causal impact2, while three others, and Schwerzer’s and Hess’ own work were not able to find this causality. The reason for the ambiguity in results is because inflation and wages move so closely together that attempting to separate and isolate which one causes which is not straightforward to do. Their own work focused solely on establishing the direction of causality, using what is called in economics and statistics “Granger causality”, which is a test whether the future values of one time series3 (inflation in our case) can be predicted by past values of another time series (nominal wage growth) and vice-versa. The review and analysis conducted by Schwerzer and Hess suggests that increasing wages do not cause inflation. On the contrary, evidence likely points to inflation driving increased wages."

So I would say so far the preponderance of evidence suggests there is unlikely to be causality of wage growth on inflation. Multiple methods have shown the causal link is unlikely.

However, it is true that if wages didn't rise (that is workers would take real pay cuts) then inflation would fall, which is the main channel central bank interest rate hikes work to reduce inflation.

What is more important in the current inflationary surge, is that the behavior of wages is entirely consistent with previous similar historic inflationary episodes. If anything, they're actually a bit lower than in the past. The focus on wage growth as a concern is not warranted at these levels.

> If costs go up, companies must raise prices to maintain normal profitability.

That is only true if salaries make up a significant amount of production.

My favorite example was a job at a cookie factory. A hall full of giant machines, multiple production lines. Mine, counting 5 humans produced FIVE HUNDRED THOUSAND boxes of cookies per day that cost 99 cent in the store. In a 5 hour shift I earned 35 euro.

5 X 35 = 175

500000/175 = 2857 euro for each 1 euro worth of salaries

IOW salaries make up 0.035% of what customers pay.

Would the cashier or the truck driver be earning 100 k per day? The 30 ish people in the office? Would they get 100k for "running" multiple production lines?

It is frankly insulting we pay people to talk economic rubbish like that. The giant building, the ovens & production lines, the trucks and the ingredients must be handed down by the gods for free?

In my current job I clean trains for ohh something between 5000 and 20 000 people per day. Assuming a 20 k day each traveler pays me 0.0075 euro while a ticket costs [say] 50 on average. THREE out of TWENTY THOUSAND pay for my labor.

They need multiple people to clean and drive the train of course. It quickly adds up to.... nowhere near a million euro.

Building a train, train stations and laying track involves a lot of people but it isn't that (to put it scientifically) the workers are pulling the rails out of their ass or are hammering out the components on an anvil. It involves a ton of equipment.

So they put down tracks 50 years ago using machines build 60 years ago in factories build 70 years ago using tools made 80 years ago in factories build 120 years ago. etc

Lots of labor, it took very few economists. They sit in the train, eating cookies, complaining about how expensive the ticket is. One says it must be labor, they are still talking about this to this very day and will continue to do so until the end of time.

That's true at a microeconomic level (i.e. single company), but at the macroeconomic level we are talking about aggregate wages as a percentage of all company costs.

As an aside, I think you might be underestimating the percentage of costs that staffing take - Take your example of train operations.

The report below shows that Staffing Costs are approx. 28% of a train operators costs within the UK (NB: this would not include costs maintaining the rails).

https://www.orr.gov.uk/sites/default/files/om/toc-benchmarki...

In your job with the cookie factory, you are also underestimating the amount of labour - I assume there were office staff, people who transported the cookies, people who made the raw ingredients, shopkeepers who put it on the shelf, all of whom have to be paid for within the ultimate retail cost. At that scale of production you will also require technical managers, maintenance engineers, marketing teams, QAs...

if you'll allow it:

Long long ago there was a bakery, the owner baked cookies and sold them. People were able to buy the cookies. He made a living doing that. We've somewhat upgraded the process from there.

We went from factories full of people producing many cookies to halls full of machines. We went from really expensive custom machines to unbelievably cheap ones.

The maintenance engineer works many lines, he has to do some work when something breaks but between those repairs tens of millions of cookies are produced. The designer does his job every 1-2 billion boxes of cookies but only if it is a custom job. If it is a generic machine it will be many billions more. He costs 20-30 boxes of cookies per day. If they pay him 15 or 45 it changes nothing.

Ford wanted his employees to drive cars. Do you think 35 euro per day is a budget with room for cookies? Do you think it is justified for anyone to complaint about my salary? Show me the man brave enough to say it to my face? Each of these jobs involves someone having to tell you your salary. The body language is roughly that of a doctor telling you you have 1 week to live.

I just needed work asap, this was what was available. Not very surprising, no need to ask why the last guy left. I cant say I didn't enjoy it, it was a marvel of engineering that few get to see from the inside.

I remember a time in the 80's when manual labor paid really well. About 4000 vs 700 per month and purchase power was infinitely greater* People were proud, they cared about the company, they made an effort to keep things running, meet deadlines, run the extra mile. No one asked if they wanted to work overtime, it was obvious when the job had to be finished. People had a sense of duty.

Now the cookie factory has 5 job agencies with ~50 people looking for the next idiot to enslave in the factory only for the victim to vanish unexpectedly creating a constant state of panic and increased pressure on the recruiters.

It was hilarious how they shouted at me over the phone when my time to vanish came. Apparently they lost 3 that morning. During the call I looked up his salary online. I told him 3600 seemed nice but I wouldn't take a job shouting at people over the phone.

I've done cold calling too, I know shouting at people is not very likely to get you what you want. It is hard to convince a recruiter to increase the salary if his salary depends on not understanding it.

The spiel is obvious, they want to throw money at it until they find a stable pool of useful idiots that they won't have to pay.

It's been 8 years and the job offer is still plastered all over the job websites. They promise at least one 5 hour shift, you will be on call all week for all 3 shifts 7:00 till 23:00, have to be there in < 15 minutes.

In a context like that should we really blame those damn cashiers with their 5 euro salary? Oh wait, it is all self checkout now. Strange, the cookies are still 99 cents?

I read UK Railway workers earn wages 70 per cent above the national average. 28% / 1.7 = 16.47% Then they are "overpaid" 11.53% already.

You get 70% more purchase power for shall we say 7% more expensive tickets? (guestimating maintenance this time)

How much extra disposable income would that 70% produce? 1000% ? 2000% ?

It's probably a lot of cookies, cookies every day! I think the economy would like it.

I’m not ruminating on if it’s a good idea to pay people more or not, I’m just saying that there is an impact of wage increases on inflation.

Besides - if the cookies are still 99 cents after all these years then they actually are cheaper in real terms.

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