Will Wage Inflation be the Architect of Stagflation?

Source: Bloomberg, Federal Reserve Bank of St. Louis, Unigestion, as of 30.09.2021.

In their book ‘Economics of Worldwide Stagflation’, Michael Bruno and Jeffery Sachs discuss how the downward inflexibility of wages feeds into the price/wage spiral and can shift an economy from inflationary expansion to stagflation.

Our chart shows how US nominal wages during the 1970s continued to grow steadily, as employees demanded higher wages in the face of higher consumption prices. However, this nominal wage growth was out of line with deteriorating economic conditions and lower productivity, leading to layoffs and higher unemployment. Importantly, real wage growth collapsed as nominal wages could not keep up with goods inflation, leading to lower real incomes and standards of living. Will we see a return to this past?

Note: In the chart, Productivity Growth is the year-over-year change in the output per hour of labour in the non-farm business sector.

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