Inflation: Should wages be raised to counter rising prices?

Inflation: Should wages be raised to counter rising prices?

The rise seems unstoppable. Inflation reached 5.8% over one year, at the end of June 2022, the National Institute of Statistics and Statistics announced on July 13. The direct result of this price increase: the French will lose on average 1% of their purchasing power in 2022, and this, despite the measures instituted by the government, the Bank of France predicts.

To limit the damage, trade unions, as well as the left-wing Nupes coalition, are calling for higher wages, pensions and the social minimum. Allegations that the government does not completely ignore. The “purchasing power” bill, discussed Monday at the assembly, provides for a reassessment of a wide range of social benefits and civil servants’ wages. The Minister of Economy, Bruno Le Maire, has repeatedly encouraged businesses “Who can” To increase wages, or to redistribute the purchasing power of employees in other forms (profit-sharing, “Macron bonus”, etc.).

Is it possible to find a solution to inflation? Not that simple. “In most cases, the government does not have the authority to issue a decision to increase salaries”, remembers above all Sylvain Bersinger, an economist at the consulting firm Asterès. Except for the minimum wage, IWages have not been linked to prices since 1982, when this mechanism was shown to contribute more to disease than to cure it. In the 1970s, the oil shocks caused the cost of energy to soar, driving up double-digit inflation. Because wages were tied to prices, wages were revalued several times a year. To absorb this extra cost, companies, whose profit margins had been eroded by the crisis, then raised their prices…and eliminated the purchasing power that had been recovered through wage increases. And so on. This is the so-called price-wage spiral, in which increases fuel some others. It is an undesirable condition because “It can only be broken by a sharp rise in interest rates and a recession”explains to AFP Eric Heyer, director of the analysis and forecasting department at OFCE.

to rise generalized Today’s wages have the same effect? “This risk does not seem entirely absurd to me, especially when we see what is happening in the United States, which has entered this inflationary phase faster than we have and is now experiencing a rise in prices throughout the economy.”destined Sylvain Bersinger. Analysis shared by Francesco de Palma, lecturer in economics at the University of Strasbourg and specialist in the labor market. “lamWhen chicken wages increase too quickly in relation to labor productivity, firms pass on these increases to prices.” So that their margins are not reduced. However, productivity gains have slowed since the mid-1970s, growing only about 1% annually since the 2000sAccording to France’s strategy. Moreover, there is always a risk associated with uncertainty overburdening the behavior of economic actors: firms may view inflation as an “unexpected effect” to justify excessive increases in their prices, which would lead to a wage-price spiral, the economist asserts. Clemens Pearson, researcher in the Interdisciplinary Laboratory for the Evaluation of Public Policy (Liepp), attached to Science Po.

However, this scenario is uncertain, as many economists interviewed by franceinfo argue. In contrast to the 1970s, central banks are now aware of the risks posed by inflation, and their job is to keep it at around 2%. In order to curb its rise, they have already started to act by raising key rates (the interest rates applied when lending money) and stopping their buying programs Assets (state and corporate debt securities). Due to the high cost of money, economic actors are not encouraged to spend, which slows down consumption and thus… prices rise. According to the forecasts of the Bank of France, inflation should continue to rise until the beginning of 2023, before starting to decline and return “about 2%” – threshold required – in 2024.

Moreover, while salary increases have already been negotiated since the beginning of the year, especially for lower levels, they are “about 3%”which is below the level of inflation, notes the Bank of France. “MEven if there are employment tensions in some occupations, unemployment remains at a high level, and employees are generally not in a position to negotiate large salary increases.Christine Erhel analyzesAnd the Professor of Economics at the National Institute of Arts and Crafts.

Whoever says salary increases this year does not say return to the last indicator of inflation with regular increases. “lamis the current demand of the employees is to maintain their purchasing power, The economist notes. We are not required to raise wages as was the case in the seventies, which was part of the dynamics of Trente Glorieuses” With a permanent rise in the standard of living. On the other hand, “Once prices go up, they don’t go down”as Clemence Pearson asserts.

“Increasing wages will compensate for the lost purchasing power, without exceeding the level of inflation and risking an inflationary spiral.”

Clemence Pearson, Economist

in franceinfo

Finally, companies, especially those that are only marginally affected by increases in energy and raw materials prices, are not obligated to pass wage increases into their prices, assures Sylvain Bersinger. ‘Whatever it takes’ policy during the Covid-19 crisis has protected its margin rate 32.2% at the end of the first half of 2022, according to INSEE, more than before the crisis (31.6% during 2018). In short, there are many reasons why an increase in wages without exceeding the level of inflation does not necessarily lead to an inflationary spiral.

althoug, There is no ready-made solution to the current situationconcludes Sylvain Bersinger. France is going through an imported inflationary shock caused by our energy dependence, and we have no way of avoiding it entirely. We must try to strike a balance so that the state, companies and families bear the cost. In other words, according to the economist, the state can play its role by adopting targeted measures to relieve the portfolio of the poorest groups, but it cannot do everything in the context of high interest rates, as debt therefore costs a higher cost than before. TheCompanies have a role to play by waiving wage increases even if it means shrinking their profit margins. And again, he said, families must accept a temporary loss of purchasing power. In this context, measured increases in wages can be a solution to limit the damage caused by inflation. But they will not solve the initial problem, the Bank of France recalls. In a letter to Emmanuel Macron, the foundation offers him two ways to lower inflation: accelerating the energy transition to reduce our dependence on the rest of the world, and boosting employment to revive growth.

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