On Wages and Inflation
Very recently, for the first time in history, average pay for workers in supermarkets and restaurants nationwide climbed above $15 per hour, in part due to the labor shortage we have addressed previously. Confronted with this new reality, business owners and the semi-intellectual hacks that speak for them have begun to warn of a great calamity: rapid inflation. According to this prophesy, increases in wages will force increases in the prices of consumer goods, leading to inevitable economic ruin, all due to the greedy wage workers, many of whom are now earning enough to stave off poverty for the first time!
A mood of grim foreboding dominates the headlines. NPR points to Federal Reserve chairman Jerome Powell, who blames the runaway inflation of the 1970’s on this dread wage-price cycle and suggests may be right over the horizon. The Washington Post is even more explicit, referring to the words of one supposed ‘good boss’:
“There’s a big difference between paying workers $15 because their productivity warranted it and being forced to pay a $15 minimum wage.
There are some staff — those with less skills or experience — who aren’t yet productive enough to earn $15…If he and his competitors were forced to pay those workers more, menu prices would soar…The impact would be even more severe if the new minimum wage were to apply to tipped workers.” [emphasis ours]
The message from the business owners is as follows: Not only will rising wages cause rising prices, which will destroy any wage gains, they will result in economic collapse and untold misery.
The business owners would have us think that raising wages is like pulling a lever, which mechanically raises prices to the same extent. The “argument” is that, if wages rise, capitalists will proportionally increase the prices of the goods they sell. Therefore, more money will be needed to allow the purchase and sale of those goods.
Against this “argument,” we need only point out that if business owners could raise prices as they wished, then they would need not wait for a wage rise to do so. Why would capitalists oppose trade unions – or trade-union building projects like that of RWU-STR – since any wage increase could be met by an even higher price increase? Capitalists cannot on their own determine the price at which something sells, beginning with the fact that they have to compete with other capitalists who are more than willing to undersell them in order to steal their market share.
The reality is that the level of productivity – which determines the amount of time it takes for a product to be made – is far more significant than are wages in determining prices. With a rise in wages, more money will be in the hands of workers. The rise in demand for basic wage goods will indeed lead to a short-term price rise. In order to meet demand and take advantage of higher prices, increasing numbers of capitalists will invest in producing wage goods. The scale of production will increase, and with it the need for money to circulate the higher number of products on the market. In the long run, the price rise will disappear.
Moreover, increasing competition between capitalists will force them to innovate in order to raise productivity and undercut competitors. The total value of products will fall even as the number of products increases. Thus, everything else being equal, the initial wage rise will ultimately slow the rate of inflation. Wage increases do not lead to durable price increases.
We can point to numerous historical episodes in which those that claimed that prices were regulated by wages were proved utterly wrong. One such example is as early as 1848, following the passage of the Ten Hours’ Bill in Great Britain, which limited the working day and effectively increased the value that workers received relative to the total they produced. Instead of inflation, the overall price level actually declined as wages increased, and Great Britain not only retained, but expanded its industrial monopoly over the world.
Somewhat more recently, in the 1970s, the US economy famously experienced so-called “stagflation,” that is, on the one hand, stagnation – in which unemployment soared and wages plummeted, and on the other hand, soaring inflation, as indicated by measures like the Consumer Price Index (CPI). Two graphs tell the tale. This is what happened to wages from 1970-1980:[1]
And this is what happened to the CPI during those same years:[2]
These historical episodes of the Ten Hours Bill (rising wages, falling prices) and 1970s stagflation (falling wages, rising prices) should be enough to give the lie to the capitalist myth that it is rising wages that determine inflation.
We have said that in general, productivity is far more significant than wages in determining the price level. But what about a labor-intensive industry like restaurants, in which there are only limited possibilities of introducing machines that can enhance productivity? Here should begin by thinking about all the money in the owners’ pockets.
It is clear that at the center of every struggle over wages is the question of how much of the value produced by workers is kept by the working class, and how much is taken by the capitalists. The outcome of this struggle will alter the rate of profit, i.e., the return on investment, in one direction or the other. If wages rise for restaurant workers, the owners will indeed try to increase prices in order to compensate for the fall in the rate of profit. However, as we said above, we cannot expect demand to increase along with prices, and the limits of the market, together with competitive pressure from other businesses, will drive prices back down. In the end, a new, lower rate of profit will be established.
All other conditions remaining the same, a general wage rise would therefore result in a fall in the rate of profit, but not a significant and durable rise in the price of goods.
This is not to say that restaurant owners would remain content with a lower rate of profit. With the nature of restaurant production limiting mechanization options, the restaurant owners will try to reverse the fall in the rate of profit by forcing workers to increase the intensity and duration of labor, making them work that much harder or that much longer in order to expand production. This is what will happen in the current situation. For this reason, our future trade union will not content itself with struggling over wages, but also over the intensity of labor and length of shifts.
* * *
The business owners and the pseudo-intellectual servants are peddling stories that make the rising wages of restaurant and other workers appear to be a danger to the public, and to make starvation wages seem like something that is necessary for the collective good. In the face of these lies, we must assert several fundamental realities:
The prices of commodities are determined by the labor-time necessary to produce them in our society.
Capitalists do not purchase labor, but labor-power, that is, the capacity to labor. The value of labor-power is the value of the wage goods that produces our physical and mental capacities to labor every day: food, clothing, entertainment, shelter, etc. We all know that when a Walmart stocked with cheap products comes to town, it places downward pressure on money wages, because workers can purchase the same wage goods as before with less money.
Profits are the total new value produced by workers minus the value of labor-power, i.e., wages. Everything else being equal, higher wages mean lower profits, and higher profits mean lower wages. This is the basis of the conflict between capital and labor.
The struggle of workers proceeds from the need to collectively sell labor-power at the best price possible, so that we can increase our basic wages with a greater portion of the new value we produce. Our unscrupulous adversaries, armed with tall tales about the danger of high wages, perpetually seek to drive us into poverty. It is up to us to organize our ranks and take what is ours.
[1] The blue line represents real hourly compensation for all employed persons, while the green line represents average hourly earnings of production and nonsupervisory employees, total private. See <https://fred.stlouisfed.org/graph/?g=GagO>.
[2] The blue line represents the CPI for all urban consumers (all items in US city average), while the red line represents the CPI for all urban consumers (all items less food and energy in US city average). See <https://fred.stlouisfed.org/graph/?g=ANNk>.