Why Are Stimulate Checks Not Keeping Up With Inflation and What About Social Security


David Mudd

In recent months, there has been a great deal of concern about growing inflation, which is exacerbated by the fact that wage inflation has not kept pace. A few high-paid workers have benefited from increased bonuses and inflation-busting pay raises—for example, CEO pay has just been reported to have recovered to pre-pandemic levels. However, for the vast majority of workers, rising price inflation is diminishing the real worth of their wages.

More than a fifth of workers are unable to afford the necessities of life. The cost of living crisis is a fact of life for them, not a tired political cliché. It’s a recipe for disaster. Its resolution calls for a reassessment of inflation policy, as well as the economy in general.

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Lower unemployment, according to textbooks, is the source of increased pay inflation; the so-called Phillips curve is based on the negative link between unemployment and wage growth. Wage-price spirals, in which increasing prices fuel higher wages, are also included in the textbooks. The experience of the 1970s, when greater prices and higher earnings coexisted, resulting in stagflation, bolstered this line of thought.

However, the present demonstrates how price and wage inflation can be separated. Workers are experiencing real pay cutbacks, with no sign of salaries catching up with headline inflation, as a challenge to economic theory. Despite the fact that unemployment is low, this is the case. Lower real living standards are now the price of working for a living and the price of a job-rich economy.

Why is wage inflation so low?

Wages have really been stagnant since the global financial crisis of 2007–08. Real wages fell in the years following the crisis, and while they were able to rise again from 2012 onwards thanks to low inflation, they just recently returned to 2008 levels.Why Are Stimulate Checks Not Keeping Up With Inflation and What About Social Security

It’s a bit of a paradox that this is all they’ve accomplished at an era of low unemployment. It’s not fully clear how to explain this, but a number of factors could play a role.

The first is the fall of union power, which is accompanied by an increase in firm power. Unlike in the 1970s, British workers are not able to organize to collectively seek and win salary raises. Individual negotiation is common, and finding a new job is typically the greatest method to receive better pay. Profits have increased by roughly 60% in real terms over the last 20 years, compared to a 14 percent increase in real wages.

Second, there are additional unemployment indicators. While recorded unemployment has decreased, actual unemployment has increased: people on incapacity benefits, who are in huge numbers in places like Wales and Scotland, would be working if suitable jobs were available, but are not reflected in official unemployment figures.

The fact that there has been a recent increase in economic inactivity, with people (especially older ones) leaving the workforce, shows that there is some hidden unemployment. This is significant because it shows that workers’ bargaining power may be lower than the official unemployment figures suggest.

The importance of lags comes in third. While wage inflation may not be rising at the same rate as price inflation right now, some experts believe it will begin to rise in the coming months, possibly even overtaking price inflation. The Bank of England Governor Andrew Bailey made this reasoning, prompting him to argue for pay restraint.

While salary increases above inflation cannot be ruled out, it appears improbable that employees in all industries and areas would be able to assert their authority in ways that maintain their real salaries. Indeed, before any lags emerge, the chance of wage inflation catching up to headline inflation could be hampered by rising unemployment as the economy contracts.Are you a person who does not make a lot of money? For this reason, Social Security may pay you more generously than you expected.

It’s time to implement new policies.

At the moment, central banks in the United Kingdom and other nations are combating inflation by hiking interest rates and reversing quantitative easing’s “money creation.”

With the Bank of England predicting that inflation will peak at roughly 10% in the coming months, this policy stance is becoming increasingly unconvincing. Instead, new regulations are required to ensure that salaries keep pace with headline inflation, especially if employees are to avoid economic hardship.

The government’s (late) decision to provide direct cash assistance to the poorest members of society to cope with skyrocketing energy prices is a positive move.

While the government declared a few months ago that it intends to raise corporation tax from 19 percent to 25 percent for most businesses starting in 2023, it has only just agreed to levy a windfall tax on oil and gas corporations to help pay for this support, despite past calls to do so. The larger takeaway from this U-turn is that the government has a duty to protect the economically disadvantaged, which includes redistributing income in this manner.

However, the fact that the support payments are one-time is problematic. If energy prices continue to rise, would the government issue new cash transfers? Its fiscally conservative impulses will almost certainly prevent this.Why Are Stimulate Checks Not Keeping Up With Inflation and What About Social Security

Support payments, in any case, do not assist in bringing wage inflation up to par with headline inflation. If workers had more bargaining power, this would be easier to achieve.

Workers’ negotiating power must be restored through fundamental reforms. It requires rethinking corporate governance structures and providing employees more control over their workplaces. It also means bolstering union influence and expanding public and worker ownership options.

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Only by addressing the power imbalances that perpetuate low real wages will we be able to build a sustainable economy that serves everyone, not just a select few.