How ‘wage inflation’ is hurting Americans

Want to know how “wage inflation” is affecting Americans? The best model is perhaps the French, who this week put in place their minimum monthly wage of €13, or about $16, an 85 percent increase from 2013.

The price of a loaf of bread has risen a mere 5 percent since then, so the relatively high minimum wage has played no small role in pushing food prices higher. Without a separate minimum pay floor, low-wage jobs likely would have kept wages relatively flat. To stabilize the labor market, the French government has also directed its money toward retraining workers displaced by automation or workforces moving up the economy.

“We’re moving from a relatively high deindustrialization of the economy to a relatively high deindustrialization of services. For wage earners, the impact is significant,” Francois Ferré, chief economist at BNP Paribas, told Bloomberg.

There’s a similar case in Italy. The purchasing power of the minimum wage nearly doubled to €8.84 ($10.81) after a five-year increase, which caused food costs to rise nearly 20 percent in the first half of 2018, according to the group Confcommercio. At the same time, consumer prices rose only 1.9 percent, according to the Italian statistics agency ISTAT.

“The rise in the minimum wage has an impact on prices since this year,” said Marco Marini, chief economist at Confcommercio. “Increased demand for services, in an era of high inflation, has reflected in better demand for services.”

As that happens, workers are demanding to be paid more, but the effect is less dramatic in Europe because prices have risen so much. Consider: In the United States, “wage inflation” in July amounted to a slight 0.5 percent increase in the annual rate, says the Labor Department. Meanwhile, Britain and France are struggling with inflation, too: In July, Britain’s CPI rose 2.9 percent, France’s 2.7 percent.

In the United States, low wages have historically been an annoyance, and a federal law aimed at making it easier for workers to make a living before the Great Recession had left no doubt that the results are real.

The biggest concern has been the widening gap between high- and low-wage workers. Many have stopped working in favor of seeking retraining and other paid amenities, while others are poor. “These trends have distorted the U.S. income distribution, particularly among lower-wage workers,” said Trevor Tompson, a professor at Ohio State University.

He added: “For example, if a household earns $50,000 but spends $40,000 a year, it’s really not making very much. But for the household with a wage of $40,000, their income falls from $27,000 to $25,000. The middle group is really in trouble.”

It’s not just low-wage workers that’s being hurt: There’s another problem — because prices rise faster than wages, wealthier Americans are seeing the value of their paychecks decline. This phenomenon “is most notable in the services sector,” according to a recent report by the National Bureau of Economic Research.

Leave a Comment