“A Good compromiseThe proverb says, “When both sides are dissatisfied.” Dissatisfaction has spread in the post-lockdown economy. Households say price-raising companies are pushing up prices, contributing to a 6.6% annual inflation rate in the rich world. That they are a truly unjust group. They allege that workers have become workaholics who are always demanding higher wages. Earlier this month, Bank of England Governor Andrew Bailey sparked controversy by advising workers to restrain their wage demands. Fail to tell companies not to raise their prices.
A “markup war” is raging between high wages and high store prices. And there can only be one winner, all the others are equal. Broadly speaking, economic output must flow to the owners of capital, in the form of profits, dividends and rent, or in labor as wages, salaries and benefits. Economists refer to it as “capital” or “labor” GDP. In the post-lockdown economy, which of the two is on top?
Economist Has compiled a range of indicators to answer this question. First we calculate a high-frequency measure of capital-labor sharing in 30 rich countries. The share of total labor across this group increased in 2020 (see Chart 1). This was mainly because the agencies continued to pay wages to the people – for the most part, helped by government-stimulus programs – even GDP Facilities collapsed, labor.
More recently, however, the war seems to have shifted in favor of capital. The rich-world labor share has fallen 2.3 percentage points since reaching the top in 2020. Disappointingly, the data only goes until September 2021 — and most economists, however, argue that the share of labor is not a perfect measure of economic fairness, because it is satanically difficult to measure. Evidence since then suggests that countries fall into one of three buckets, depending on how the markups battle.
Britain is in the first camp. There, underlying wage growth is 5% per year in the region, unusually fast by rich world standards. But corporations do not seem to have much pricing power, which means they are struggling to completely offset high costs in the form of high prices. Digging into the UK’s national accounts, we estimate that the nominal profit per unit pound of goods and services sold is fairly high as early as 2019, even as unit labor costs increase by about 3% per year. Labor seems to be winning at the expense of capital. Perhaps Mr. Bailey has a point.
The second group includes other rich countries outside the United States. Neither labor nor capital seems to be able to win there. Japan’s wage growth appears to be slowing below 1% a year after corrections for epidemic-related distortions, Goldman Sachs, a bank data suggests. Wage settlements in Italy and Spain are on the rise, while wage increases in Australia, France and Germany are below where they were before the epidemic. Workers in these places are not really joining the inflation group.
But business is not growing. In Europe, pre-tax profit margins, as measured in national accounts, have risen in recent months but remain below where they were just before the epidemic. Large and medium-sized companies in Japan have recently returned to pre-epidemic levels before tax. The profits of small companies, however, remain low.
America is in the third group. Here wage growth is rapid, about 5% per year. But their recent financial results show that large listed American companies are doing better to maintain margins than analysts expect. A series of unusually large stimulus deliveries could mean that families are able to absorb the high prices companies impose. In early February, Amazon said it would increase the price of its prime membership package by 17% in its home market – although it chose not to announce price increases in other parts of the world.
Some companies are increasing their margins despite rising costs. Tyson, an American meat producer, has jumped 18% in the cost of its inputs in the most recent quarter compared to a year ago, with its average selling price up 19.6% and its consistent operating profit up 40%. It said demand had not declined due to rising meat prices.
An economy-wide measure of corporate margins is growing rapidly. Dario Perkins’s TS Lombard, a financial services company, has broken up unit prices in the United States since the onset of the epidemic, splitting companies into labor costs, non-labor costs and profits. Wages are rising, but markups are still responsible for more than 70% of inflation since the end of 2019, he sees (see Chart 2). In a recent report, Bank of America analysts argue that greater pricing capabilities help explain why American equities have higher price-to-earnings ratios than Europeans.
Well, you’re all unhappy
The story is not over yet. Some economists wonder if workers will demand even higher wages long ago to compensate for higher prices in stores. There is some evidence of this in the United States and Britain, where wage growth seems to be accelerating. Business expectations for future wage settlement are fairly conservative, although this may change soon. If wages begin to rise more rapidly, the cycle of price increases and compensatory wage demand may begin again. Long ago, the post-lockdown economy could look like a final compromise – where no one is satisfied. 3
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This article is published under the heading “War of the Markup” in the section on finance and economics of the print edition.