To avoid enduring inflation, some combination of three things must happen. Firms could absorb higher wages in their margins rather than raising prices. Productivity growth could make higher increases in real-wages sustainable. Or idle workers could return to the labour force, dampening wage growth.
In the popular imagination workers’ share of the economic pie has room to grow at the expense of profits. But recent research suggests that labour’s share of the value created by firms has in fact been fairly stable in most rich countries during recent decades. We estimate that it has already risen by one percentage point on average in big rich countries during the pandemic. There may not be very much scope for further increases.
Higher productivity growth is a reasonable hope. Output per worker has risen in America since the start of the pandemic. The digitisation brought about by the pandemic should boost living standards, particularly if it reduces the need to live near expensive cities to get good jobs. The trouble is that time lags make it hard to base policy on productivity trends. They are hard to measure in real time and it takes about 18 months for central banks’ decisions to fully feed through into the economy.
That means policymakers should focus on the labour supply. Its recovery has been disappointing so far. There is surprisingly little sign that the end of emergency programmes, such as America’s extended unemployment insurance and Britain’s furlough scheme, has increased the number of people looking for work. Perhaps, though, as bank accounts run dry and the pandemic abates, some slack will reappear in 2022, causing wage growth to slow. Even more than usual, monetary policymakers should keep their eyes fixed on jobs. ■