Frustrated With Your Boss? Blame Inflation

(Bloomberg Opinion) --As a general matter, workers hate asking for a raise. It’s time-consuming, awkward and even risky. Should you shop around for an outside offer to gain leverage? What’s the best forum to broach the topic? And what if the conversation leads to lasting resentment or retaliation? Under normal circumstances, some of us wouldn’t even bother, even if we knew we were forgoing earnings in the process.

But the inflation of the past several years has changed that. Rising consumer prices disrupted our innate preference for conflict-free stasis, forcing us to fight for our purchasing power. Resignations surged and so did nominal wages. Evidently, many of us finally learned how to have those awkward conversations.

This slightly uncomfortable state of affairs helps explain why people hate inflation so much and have been consistently despondent in consumer sentiment surveys in recent years, even after wage growth outstripped inflation and the macroeconomy started to hum. It’s not the only possible explanation (see this take by my Bloomberg Opinion colleague Claudia Sahm), but it may help explain a disconnect that another Bloomberg Opinion contributor, content creator Kyla Scanlon, has dubbed the “vibecession.” Nominal wages may have caught up to prices, but that’s largely because workers fought hard and overcame their own aversion to conflict to essentially end up in the same place. To a lot of people, that’s a bummer.

And that’s essentially the subject of “Why Do Workers Dislike Inflation? Wage Erosion and Conflict Costs,” a paper by Joao Guerreiro, Jonathon Hazell, Chen Lian, and Christina Patterson. Here’s an excerpt:

We show that accounting for “conflict costs” meaningfully changes our understanding of the costs of inflation, both analytically and quantitatively. In this setting, what matters for workers’ welfare is not how inflation impacts real wages, but rather how inflation would affect real wages if workers did not choose to engage in more conflict as inflation rises, a concept we term “wage erosion.”

First and foremost, the paper updates the way that academic economists can think about the costs of inflation. It isn’t always intuitive why we’re supposed to hate inflation in the first place, as long as nominal wages and interest paid on savings can keep pace.

Economics textbooks have long tried to explain it through concepts such as “menu costs” and “shoe leather costs.” The original idea of the former is that firms incurred costs when they had to — literally or metaphorically — change and reprint the menu on a regular basis to reflect changing prices. But the name and the concept feel antiquated in an age in which we scan QR codes when we sit down to order at our favorite bars and bistros.

Similarly, shoe leather costs referred to the hassle of having to run to the bank a lot more in inflationary times to withdraw funds. You wouldn’t want to hold too much cash — the real value of a dollar falls as prices rise — so you’d be inclined to keep your money in an interest-bearing bank account. But that too seems laughable in an era of digital banking when many of us pay with our phones or cards. The paper gives us a new way to explain our innate dislike of inflation that seems to resonate better in the year 2024.

It also helps us quantify our distaste for conflict. Using a survey, the researchers find that the median American worker would give up 1.75% of their wages to avoid conflict. In general, workers in the survey assume that their employers won’t automatically adjust their wages for inflation, but many of them are still initially averse to fighting for catch-up pay. The researchers also use cross-country data from 1964 to 2022 to document how conflict increases as inflation rises, finding a positive correlation between inflation and labor market strikes.

The research raises some interesting questions with implications for the next few years. In a conversation with David Beckworth on his Macro Musings podcast, Hazell said his paper may make policymakers even a bit more wary of inflation than they were before. On the controversial question of whether the Federal Reserve ought to target a higher rate of inflation, the research would seem to argue against an adjustment, showing that inflation is insidious in ways we didn’t previously understand. “If you raise the target from 2% to 4%, people would be having to conflict twice as much,” Hazell told me by phone this week.

Still, if inflation has a way of making workers finally speak up for themselves, I also wonder if that’s such a bad thing. The disappearance of inflation in the decades before the Covid-19 pandemic coincided with underwhelming real-wage trends, and a part of me wonders if that was — at least in part — because we forgot how to advocate for ourselves, as proxied by the decline of union activity. Now that the 2021-2023 inflation is fresh in our minds, might we be entering a period of more compensation negotiation and, therefore, more sustainable real wage gains? Might workers start negotiating harder for promotions and spending more time seeking out roles that make them happy and productive? Tension at work is always uncomfortable, but maybe workers hold themselves back when they get too cordial with their bosses.