United Auto Workers confirming tight labor market.

by | Sep 23, 2019

“To labor is to pray.”

– Motto of the Benedictines

The recent actions of the United Auto Workers are beginning to finally confirm that the US labor market is tight.  Maybe this group of workers have discovered that some of the bargaining power has finally shifted in favor of them after a long period of absence. 

Labor markets have been tight for a long time, but overall wage growth has remained surprisingly muted.   And even with modest wage gains over the past few years, productivity growth has provided an offset to keep inflationary forces in check.  This combination has allowed the Fed to keep a dovish stance as it pertains to its inflation mandate.  But the UAW’s recent actions should be concerning.  

Organized labor’s newfound confidence may translate into higher wages and without productivity gains continuing, higher inflation may change the narrative at the central bank.  Uncertainty about trade policies and falling business confidence undermines investment spending, the backbone of productivity.  Higher inflation in the US is not necessarily a detriment to sustained growth, but at some juncture, the Fed may weigh in with higher rates, putting pressure on the expansion.  Recall that central banks have a good playbook and much success in dealing with inflation, but not with deflation.  

Worrying about inflation should probably be postponed until sometime in the future as the Fed has communicated willingness to live with inflation above the policy rate target. But their patience will be limited.  Inflation can originate from various scenarios, but with labor expense making up most of a firm’s cost structure, it’s worth watching when labor begins to understand that the labor/capital dynamic is shifting.

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