Wages and Employment Do Not Have To Decline To Bring Down Inflation

The United States—much like the rest of the world—is currently experiencing high inflation, due to a range of factors including COVID-19-related supply disruptions and Russia’s war in Ukraine. As low- and middle-income households struggle with recent inflation on top of the decadeslong affordability crisis fueled by stagnant and low wages, policies to strengthen supply and shore up households’ financial stability should take precedence over a strategy that proposes sacrificing employment to lower inflation.

Historically, countering inflation has been left to the remit of the interest rate policy of the Federal Reserve. In recent months, the Federal Reserve has been sharply increasing interest rates in an attempt to reduce demand, slow the economy, increase unemployment, and lower inflation. This risks sending the country into a recession. While low-income households often feel inflation the hardest, a Federal Reserve-induced recession would be far worse, as millions of the most economically vulnerable Americans could lose their incomes entirely.

Alternative methods exist to fight inflation and reduce the costs of essentials over the longer term that would not adversely affect low- and middle-income households. Congress and the Biden administration have pursued some of these alternatives, including through the newly passed Inflation Reduction Act. These measures reduce inflationary pressures by investing in domestic production, boosting the United States’ productive capacity, tackling long-standing issues of corporate concentration, and more. These efforts have been underway for some time now and have already helped ease inflationary pressures. They should also help the economy better absorb some future demand and supply shocks so that it is more robust overall.

At the same time, corporations also have a role to play. While some workers are finally seeing some better wage growth thanks to tight labor markets, this wage growth is far less responsible for current inflation than corporations, many of which are pulling in record profits. Companies must shift their focus from increasing prices beyond what is necessary and performing stock buybacks at historic levels to reinvesting profits into efforts that would increase the economy’s resiliency and, collectively, minimize overall inflation. They can do this by shoring up supply chains and improving job quality. Those at the top of the income distribution should bear more of the burden of mitigating inflation, rather than repeating the same tired playbook of forcing already struggling low- and middle-income people to suffer more.

https://www.americanprogress.org/article/wages-and-employment-do-not-have-to-decline-to-bring-down-inflation/