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🔔 Spiralling Back to the '70s

🔔 Spiralling Back to the '70s

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This back to the '70s theme is doing the rounds again.

There are some obvious similarities. Not just the strong anti-government sentiment, everyone being high on drugs and hippies protesting against stuff they don't really understand.

Nope. There's some economics stuff too.

You know, higher inflation, wage hikes, energy crises... End of the world as we know it and all that.

Throw them all into the mixer and there's a decent match to the story of the '70s.

There's also plenty that's different. And that matters.

At the heart of the argument is the wage-price spiral 👇

A wage-price spiral is caused by the effect of supply and demand on aggregate prices. People who earn more than the cost of living select an allocation mix between savings and consumer spending. As wages increase, so too does a consumer's propensity to both save and consume.

If the minimum wage of an economy increased, for example, it would cause consumers within the economy to purchase more product, which would increase demand. The rise in aggregate demand and the increased wage burden causes businesses to increase the prices of products and services. Although wages are higher the increase in prices causes workers to demand even higher salaries. If higher wages are granted, a spiral where prices subsequently increase may occur repeating the cycle until wage levels can no longer be supported.

Inflation is defined as a general rise in the price level of an economy over a period of time, so we can simplify the wage price spiral down to a simple Yes/No question.

Are wages outpacing price increases (inflation)?

Let's take a look at the US, starting with the Atlanta Fed Wage Tracker 👇

Atlanta Fed

It's a bit of a crude measure, but we can see that wage increases are firmly within the 3 to 4% range.

There was a time when this would be seriously outpacing inflation. Unfortunately, that isn't the case this year...

Trading Economics

Headline inflation (incl. food and energy) is tracking firmly above 5% now, so those wage increases aren't even keeping up, let alone outpacing inflation.

Over in Germany, the Unions are sharpening their pitchforks and making demands...

German inflation rose to a 29-year high of 4.1 per cent in September, while in the 19-countries that share the euro it accelerated to a 13-year high of 3.4 per cent, official data showed on Friday. Lifted by soaring energy prices, that is higher than the 3.3 per cent rate expected.

Most economists believe euro area inflation will reach 4 per cent by the end of this year, twice the European Central Bank’s target, but then fade next year.

Over 4% inflation in Germany. Soooo, what are the Workers & Unions demanding?

In one example this week, workers at German motorhome maker Carthago went on strike over pay, demanding their share of the spoils from a surge in orders thanks to a pandemic-fuelled rise in “staycations”.

“Inflation in Germany keeps going up,” said Frederic Striegler, an official at the country’s biggest union, IG Metall, explaining its demand for a 4.5 per cent pay increase and extra early retirement funds for wood and plastic workers at Carthago and other companies in the Baden-Württemberg region of southern Germany.

Unions are making similar pay demands for German workers in other areas, such as banking and in the public sector. This week, retailers and mail order companies in the Hesse region agreed to raise their workers’ pay by 3 per cent this year and a further 1.7 per cent in April next year.

Hardly spiralling out of control!

Remember this is all against a backdrop of consistently repressed wages and availability of cheaper labour.

Historically, these wage demands don't tend to be fulfilled either... 👇

Oliver Rakau / Oxford

Red line/dots = What the people demand

Blue line = What the people get

If workers have genuine negotiating power and wage demands are met/exceeded, then we could really be in for some fun.

I remain unconvinced, although I do expect the trend of wage normalisation for some of the most neglected industries (e.g. truck drivers) to continue.

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Work From Home is here to stay, especially if you're an accountant.

I was very bullish WFH in May last year.

Not every industry can pivot entirely and there's definitely an argument to be made for company culture, but the script has been flipped on WFH and attitudes are changing

Now it's more a question of why NOT rather than why...

Accounting and consulting firm PwC told Reuters on Thursday it will allow all its 40,000 U.S. client services employees to work virtually and live anywhere they want in perpetuity, making it one of the biggest employers to embrace permanent remote work.

The policy is a departure from the accounting industry's rigid attitudes, known for encouraging people to put in late nights at the office.

Other major accounting firms, such as Deloitte and KPMG, have also been giving employees more choice to work remotely in the face of the COVID-19 pandemic.

Sounds fantastic!

What's the catch? 👇

Location does factor, however, into PwC employees' pay, Seals-Coffield said. Employees who opt to work virtually full-time from a lower-cost location would see their pay decrease, she added.

Ah...

Although if you live in a cheaper area, and can save on the time and cost of commute, it still might appeal...

Once again, today's solutions are tomorrow's problems 👇

BBG

The referenced paper concludes that the increase in remote work will see:

Highskill service workers gain flexibility in their residential choices. Such changes in residential choices of high-income earners, endanger the economic livelihood of low-skill service workers in big cities who depend on local consumer services demand.19

As a result, big cities may not only lose their high-skill service workers, but also the local consumer service economies these workers support.

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Remember that Covid pandemic? Ancient history now...

(He says, crossing his fingers and inhaling hopium)

Vaccines have started the job, and there's good reason to think that pills can take it from here... 👇

Seeking Alpha