Tuesday, March 20, 2018

Is Inflation on the Horizon?

After years of slow growth, high unemployment and a stagnant economy things are beginning to change.  The rate of economic growth is increasing, more people are finding jobs and employers are beginning to increase wages are among the many signs the economy is finally rebounding.

The decline in unemployment is a very positive sign as is the fact that employers are finally beginning to increase wages.  Employers don't raise the pay of their employees out of the goodness of their hearts.  Instead, they raise wages to try to both retain current employees as well as recruit new employees. 

Unlike the depths of the past recession when employers cut costs by not replacing employees who died or quit.  Now employers are raising wages to encourage current employees to stay and not quit.  Raising wages are also an attempt to recruit new employees to fill the new positions being created.  When an employer advertises a job opening and 300 people apply there is no need to try to encourage more to apply by raising wages.  However, when an employer advertises a position and only a few apply with most being unfit for the position wages have to be increased in order to not only encourage more to apply but to also encourage more qualified people to apply.

So, after years of economic stagnation the economic growth we are seeing is very good news.

However, there is some potentially bad news.  Increasing wages will cause expenses and prices to increase somewhat.  This is especially true if employers begin competing against each other for a shrinking supply of qualified workers.  This bidding war for workers can result in rising prices and inflation as employers compete for the finite supply of workers.

However, there is a possible buffer in the form of people who have left the labor force and are no longer counted as unemployed.  Monthly reporting of unemployment shows declining percentages of those unemployed and as the unemployment rate approaches 3% and lower the threat of rising inflation is a real fear.

However, the official unemployment figures only count people who are both out of work AND are actively looking for work.  Those who have lost their jobs and have given up looking because there are no jobs are not included in the unemployment figures.

Many people became discouraged and quit looking for work during the recession.  They live off of savings, borrowing, taking reduced early retirement pensions and Social Security, a spouses income, public welfare, etc.  While unemployed, this group is not homeless or starving but many will not see a benefit in going to work just to receive an income that is no more than what they are receiving by not working.  These people are not necessarily lazy and many are keeping busy taking care of children or grandchildren, going back to school, volunteering or other worthwhile activities that allow them to be productive and give them satisfaction.

However, rising wages change the equation by offering the chance to earn more than they are earning now.  The flow of these workers back into the workforce will both tend to keep wages from becoming inflationary as well as increase output which will satisfy consumers needs without them having to get into bidding wars to obtain the goods and services they seek. 

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