To avoid sustained inflation, a combination of three things must happen. Firms could absorb higher wages into their margins rather than raise prices. Productivity growth could make higher increases in real wages sustainable. Or inactive workers could return to the labor market, dampening wage growth.
In the popular imagination, the workers’ share of the economic pie can grow at the expense of profits. But recent research suggests that the share of labor in the value created by firms has actually been fairly stable in most wealthy countries over the past decades. We estimate that it has already increased by one percentage point on average in large, wealthy countries during the pandemic. There may not be much room for further increases.
Higher productivity growth is a reasonable hope. Production per worker has increased in America since the start of the pandemic. The digitization brought on by the pandemic is expected to increase living standards, especially if it reduces the need to live near expensive cities to get good jobs. The problem is that time lags make it difficult to base policy on productivity trends. They are difficult to measure in real time, and it takes around 18 months for central bank decisions to fully impact the economy.
This means that policymakers should focus on the supply of labor. His recovery has been disappointing so far. There are surprisingly few signs that the end of emergency programs, such as extended unemployment insurance in the United States and the British leave scheme, have increased the number of people looking for work. Perhaps, however, as bank accounts dry up and the pandemic abates, some slowdown will reappear in 2022, leading to slower wage growth. Even more than usual, policymakers should keep their eyes on jobs. ■