Thinking about wages in the 1970s.
As Kit said above, "Your analysis gives too much credit to the average guy’s understanding of economics."
A simple reason ordinary people hate inflation is that they don't know much about it and expect that more knowledgeable people will take advantage of them. What was a clear, stable and straightforward earning/investing/buying institution how is changing, forcing them to devote attention to risky strategies: to battle for salary increases, to learn the new rules (if they exist, more likely there is a confusing welter of proposed rules to choose from), to change financial plans, etc.
Other things to consider:
1) inflation greatly bifurcates the range of outcomes for labor. Those with bargaining power will see wages adjust. Those without won’t. The latter falls behind at a quicker pace in a high inflation world. Its may be hard to know in advance which group you’re in.
2) Less wealthy people rationally hold a larger portion of their savings in low-volatility and cash-like investments since they cannot withstand drawdowns. These assets suffer real declines with higher inflation.
3) Consumption represents a higher % of income for the poor. Thus they face a higher burden from the “inflation tax.”
4) 35% of Americans don’t own a home. Higher inflation puts this further out of reach.
5) Inflation seems to be the enemy of productivity. Compare productivity and real wages in the 70s (weak) to the disinflationary 90s (strong).
6) Many older people are on a fixed income. Plus there is a legitimate fear that inflation-adjustments would fail to fully capture actual changes in the cost of living.
7) Taxation increases since tax-bracket cutoff-points are fixed.
8) inflation messes with our sense of fairness. We all know people who save and invest cautiously and people who maximize risk-taking and leverage. We accept that over time the former will achieve lower returns...but to purposely accelerate that process seems a bit unfair.
9) it’s unclear how much (if at all) inflation would help the US fiscal position. A significant portion of our future liabilities are quasi-inflation-indexed (TIPS, healthcare, social security, military spending).
I suspect that the main mechanism that workers have for increasing their wages is to change jobs during a time of high labor demand. Every large corp I've worked for has salary mechanisms so locked down that the only person who would have the approval to give you an out of cycle raise is your boss's boss's boss, and even then it will probably just be a percentage based raise that they'll have to fill out reams of paperwork to justify.
I had a colleague at a large corp that demanded a raise as a condition of staying - and it was either he stayed or a large account would be lost aka a complete no brainer to give him the raise - and it STILL required the approval of a senior executive in Europe to get it done. This is a multinational corp with over 100,000 employees and there wasn't a single soul in North America management with enough clout to approve a relatively insignificant raise for a rank and file employee just because it was out of cycle and larger than the "typical" raise. I suspect this level of wage standardization has a strong effect on wage stickiness.
"Why is it so hard for workers to negotiate cost-of-living raises?"
I suspect that is because workers can't unilaterally raise their wages, unlike businesses and prices; of course, a worker could go talk with his boss and say "Now my wage is 3000 instead of 2500, and if you don't accept I am quitting my job", but this is more drastic than a business raising prices, because of the almost all-or-nothing nature of job relationship (if, lets says, a restaurant raises its prices, it could sell less meals; but if an employee "raises" his wages, usually there are only two extreme scenarios, at-least in the short term - or his boss accepts [a 0% reduction in the "sales" of the worker], or the worker leaves the job [a 100% reduction in "sales"]).
Just a rando nobody here, but my observation from living as a peasant in a small city is that I could walk up to practically anybody in this town, ask "Are we experiencing inflation?" and get a "Yes" answer, anytime, anywhere, because the price of [insert anything bought yesterday here] went up three cents and a steady gradual decrease in gas prices went unnoticed. It's a fetish word.
It's June of Year 0 and inflation is starting up, so workers want more money. "We can't do mid-year raises, wait until the end of year comp cycle"
January, Year 1: "We only budgeted X for compensation increases when we did the budget a year ago. We can't squeeze out any more money to add to that -- have you seen what fuel and supplies are costing us lately? Managers, here's your comp pool. Prioritize promotions and merit increases for your most important folks, and everyone else gets a 1% COLA because that's all that's left. Be grateful we have raises at all!"
January, Year 2: "We budgeted a little more for compensation this year, but whoops, that got eaten up by hiring since it cost us more to replace all the folks who quit. We'll raise prices next year to provide a bigger comp pool. Managers, here's your pool, prioritize promos/merit for your most important folks!"
January, Year 3: "Wow, retention is really bad. Managers, please make sure you are paying your top performers so they don't leave! But everyone else should be hungry and work hard enough to deserve a merit increase, not just a COLA handout for showing up. All our employees should be above average!"
January, Year 4: "Since our workforce has undergone a 75% turnover, we now have serious salary imbalances between the new replacement folks we've hired at higher market wages, and the folks who have stayed with us this whole time and been consistently underpaid. Whoops, maybe we should do something about that."
Given the oil shock, it would seem like the jump in costs of other inputs crowded out the negotiating power of labor. If you have materials and labor inputs to your business, and the cost of materials suddenly skyrockets, you would fight to avoid increases in labor costs to limit the hit to profitability and/or a rise in the price of your product. If inflation is broad-based and incremental, like I think you’d see when it’s demand driven, it would be much easier to justify labor cost increases as the price of doing business over time. You could then pass that on to consumers more easily too.
I’m not sure how you’d formalize that, but this is a bit what we’re experiencing now with the cost of labor. In our business, labor cost has gone up, but business is good so it’s well covered.
I bargained contracts for unions for 40 years and the best "nominal" increases we ever gained were in the range of 7-8% in the late 1970s. But those increases barely kept up with inflation. In lower-inflation times, when we bargained increases of 3%-4%, we managed to gain a percent or two about the cost of living. Which was better?
I think the downward stickiness of wages answers your question about upward stickiness pretty neatly. If you are setting a price for two factors and the first can be adjusted up or down in a year but the second can only be adjusted upwards in future periods you are obviously going to be more conservative in setting the second than the first.
I lived through the late 70s as a young person trying to support a family on wages that did not increase with the inflation rate. It was scary. But something that doesn't get enough attention is that this scariness resulted in the Reagan Revolution and the GOP and various business interests have used this to promote low/no inflation policies ever since. The economic suffering and fear of the stagflation years was used as a cudgel to undermine labor laws and the progressive income tax. Since interest rates are so low in this environment, it makes leveraged buyouts and private equity easy to make mega-profits from. This also enriches investment bankers and the rest of the M&A industry. Ultimately this enabled the income inequality & mega-fortunes that are launching themselves into space that we see today.
So as much as people may have bad experiences of inflation, the real reason for the fear of inflation nowadays is the same as the fears of "socialism" and other conservative shibboleths--a coordinated PR campaign emerging from the converging interests of the extremely wealthy.
Good stuff, but you kind of buried the punchline a bit don't you think? And then you get to the end and it's like, "uh, yeah duh" - are economists really so model-obsessed as to not realize that people hate inflation because it's anxious and vulnerable work to bargain when they have so little power? Also - didn't see any mention of those living off a fixed income whose payouts or portfolio values don't increase proportionately to rate of inflation. It can be inferred from your last point about inflation eating into savings, but may be worth making explicit.
I would recommend Brazil's 80's/90's hyperinflation period. Some 2/3 different currencies in 7 years, prices changing throughout the day, people running to the markets to buy food before their wage was worth less in terms of purchasing power. For someone living here, it has always been clear that people don't like inflation because of the erosion of purchasing power.
Brazil during that time even had problems in regards to people's savings, thanks to Fernando Collor's disastrous moves. It really is an interesting period for those who want to know more about the extremes of inflation and shitty policy. Of course, for those who lived here it was hell.
I know nothing about economics, despite loving to read the blog and tweets about it (in order to learn). But could wages be automatically indexed to inflation? No negotiations, but automatically determined by it, so that every monthly (or even weekly) variance was corrected in terms of wages?
Random observation, suppose the price of everything doubled on Saturday. If you are thinking of buying a new TV, obviously doing so on Friday would give you a wealth advantage versus doing it on Sunday. In fact why not buy a new TV every Friday and then try to sell it next week for, say, a 50% increase? It would seem serious inflation that is trustworthy (every week prices exactly double), would create all types of arbitrage opportunities like this putting pressure on prices to shift before Saturday.
That would imply then that one problem with inflation is it cannot be trusted to be 'just a veil' but a bit like adding gasoline to a fire. Games like buying two TV's on Friday break down since even the exceptional profits you may be able to capture, are in a currency that is veering towads massive devaluation.
Just to confirm: MMTers don't hate inflation, they just describe what inflation actually is, namely, excessive demand on available resources/output, not an increase in the money supply per se.
MMTer's reject the indeterminate NAIRU concept of mainsteam economic orthodoxy, in favor of maintaining real full employment at all times via fiscal deficits if necessary, to enable maintenance of, and increasing productivity especially through R&D in AI and IT). Obviously government will have a more prominent role, to implement a Job Guarantee system.
Note: in Australia, unemployment remained below 2% from post war to 1960's via government deficit spending; the wheels fell off during the 70's oil shock accompanied by loss of competitiveness to Asia's low wage industrialization. Unemployment has been above 4% ever since - in goods times, with variable inflation and interest rates.
My father tells of newfound flexibility of the Mexican labor market after the 82 crash as companies conducted quarterly salary revisions. An employee conducting fraud on a company, normally very hard to dismiss under Mexican law would just walk out after a quarter or two of no revision due to massive loss of purchasing power. Eventually stickiness breaks at very high inflation levels.
It feels like you’re leaving out the possibility that consumer prices are going up relative to wages because the rate of consumables produced didn’t keep up with the rate of labour put in. That is to say, more people did the old work at the old rates but that didn’t produce sufficiently more housing and other consumables that people expect to receive for that work.
Workers can't all bargain for more purchasing power because there aren't enough things to purchase to give everyone more.