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Be careful what you wish for

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Hello,

Welcome to Known Unknowns, a newsletter where the pay is fair but expensive.

People don’t like inflation: part 7000

Is it just me or is this whole, “if the economy is so great why do people not think it is great,” mystery not a mystery? The fact is services people really value have become more expensive and continue to go up in price. Even though we recently had some goods price deflation, and the price of groceries has finally begun to moderate, the price of dining out is much higher and still rising. This is due largely to higher labor costs, which are only getting even more expensive.

And that is important. When we look at estimates of food prices moderating it does not tell us the whole story because eating out has become important to many people’s quality of life. In the last century, many once luxuries became common. Dining out used to only be a special occasion thing that now many households of all income levels do regularly. And that made lots of people happy. So did other services that became common in the last twenty years—like ride shares and fast-free delivery of everything (and seamless returns).

A tight labor market and rising minimum wages mean many services we’ve taken for granted are now a struggle, and that will mean people feel poorer because the things they enjoy cost much more.

The latest inflation report shows even more restaurant inflation, which means people will not be feeling better any time soon. And with rising minimum wages in many states, it will only get worse for them.

In many ways, it is great that wages are rising at the lower end of the income spectrum. Many of these people’s real wages have fallen in the last few decades (after accounting for inflation) and they were barely getting by. It means narrowing inequality. But one outcome is middle and higher earners (and low earners who enjoy and rely on cheap services too), who came to expect very cheap services, don’t get them anymore. And unless we mechanize everything, we will have to pay more for the cheap things we once took for granted.

So even if overall inflation continues to fall, people may still feel like everything is getting more expensive because the things that matter still cost more.

Bidenomics

Bloomberg updated their data series that assesses the economy under each of the last four presidents. I estimated changes in inequality, which we were told was the defining economic challenge of our time.

It got me thinking about trade-offs. Inequality has fallen under Biden, but only because in the first two years most Americans were worse off; low earners were just less worse off. That does not sound like the outcome we want. Notably, the only administration where everyone consistently experienced real wage gains was the Trump administration. Higher earners gained more, so inequality increased even though everyone was better off.

True, in this last year, most people finally did have real wage gains (though be careful what data you look at—hourly wages are up but hours are down) and lower-income people had the biggest gains. But everyone else is still not doing much better than they were in 2020, and they must live with more inflation risk—so in risk-adjusted terms, they may be worse off. I don’t think that making some people poorer to make others richer is the best way to reduce inequality. I prefer gains in productivity that are widely shared because I don’t see the economy as zero-sum.

I also don’t fault or credit the presidents for these outcomes. I think the real gains under Trump were more about where we were in the business cycle than any policy, though I think the tax reform was helpful on the margin. However, it does seem Biden’s policies do seek smaller gains for the top 50% in exchange for higher growth for the bottom. I don’t think that plan is fully in action yet, so I don’t fault or credit him for what’s happened either—except on the margin for making existing inflation worse.

But I do worry about how it will play out over the next decade.

The pay gap

In honor of International Women’s Day/Women’s History Month, I debated what policymakers should do about the gender wage gap for Open for Debate (formerly Intelligence Squared). I also wrote about it for Bloomberg.

First, the pay gap exists, even if it is not as large once you control for hours worked, differences in industry, and education, there is still some difference. But where the differences remain is telling. There is little gap when people enter the labor force, but it widens after women have children. It is also larger for well-educated women compared to well-educated men. And women earn even less if they marry a wealthy spouse.

Evidence suggests that mothers value flexibility once they have children, but this is an expensive benefit for some employers to offer, and it means lower pay for the women who want and need it. And even free childcare won’t change that. Less pay for more flexibility seems like a reasonable economic transaction and not one that requires a policy fix. I argue policy could make it worse because policy fixes rarely enhance flexibility.

In Bloomberg, I point out that women are doing well in the post-pandemic recovery. Their labor force participation has never been higher, while it has not improved for me. I reckon remote work etc., made it easier for employers to offer work flexibly—and it is not so expensive anymore. It may also explain why work hours are down. If technology and norms change, the price of flexibility may fall even more, and then the gap will continue to narrow anyhow—without any government intervention.

Until next time, Pension Geeks!

Allison