No Such Thing as “Wage Push” Inflation | Eastern North Carolina Now

    Publisher's Note: This post appears here courtesy of the John Locke Foundation. The author of this post is Brian Balfour.

    With the Biden administration leading the way, progressives have for months been desperately trying to shift blame for rising inflation. Putin, unused oil drilling permits, corporate greed, etc., etc., have all been used to distract from the actual cause of inflation: massive money printing by the Federal Reserve to finance historic budget deficits.

    But the blame game has been a failure. Indeed, 78% of likely North Carolina voters "believe that President Biden carries some or all of the responsibility for the historically high rate of inflation, and 60.7% believe that the policies of the federal government are affecting gas prices more than the Russia-Ukraine conflict."

    There is, however, a less talked about excuse for inflation that nevertheless is worthy of our attention: rising wages. A recent New York Times article attempted to make the case. Here's how they explained it: "Demand for services is rising just as many employers are struggling to find workers, which could force them to continue raising wages. While positive for workers, that could keep overall inflation brisk as companies try to cover their labor costs, speeding up price increases for services even as they begin to moderate for goods."

    But so-called "wage-push" inflation is a myth.

    Former Locke Foundation Senior Economist Roy Cordato explained why in this 2018 post.

    Calling it a "remnant of discredited Keynesian economics," Cordato challenged this myth with a question: "If all wages, the cost of production, and prices are going up, i.e., if there is inflation, where does the money come from?"

    The answer: money "created out of thin air" by the Federal Reserve. In an economy where the money supply is stable, Cordato explained, "spending more in one place means that you have to spend less elsewhere." For businesses, that means that rising labor costs would have to be offset by cutting back expenses on other inputs like technology, R&D, equipment, etc.

    And without an increasing money supply, businesses would not be able to "pass along" rising wages in the form of rising prices across the board. Again, if some businesses were able to pass along higher prices on their products, it would mean that consumers would have less money to spend on other items, pushing prices for those other items down.

    In sum, Cordato wrote that "higher wages are not the cause of the inflation but a symptom of it."