The political economy of inflation

That is the topic of my latest Bloomberg column, here is one bit:

Just think how the U.S. has changed. Compared to earlier decades, economic growth and wage growth have slowed, the population has aged, average job tenure is longer and Americans are much less likely to move across the country for a new job. Furthermore, more Americans have ensconced themselves service-sector jobs, where they’re sheltered by formal tenure or strong networks of allies at work. We are more set in our ways, and that means people with jobs feel more threatened by inflation.

In the rarefied world of economic theory, higher inflation would translate into higher nominal wages fairly quickly, keeping the real, inflation-adjusted wage constant.  But that doesn’t happen automatically, because employers will only pay their workers more if they fear those workers will leave or rebel. With lower levels of labor-market and geographic mobility, and with more two-income families, it’s harder for many workers to threaten to quit than before.

The net result is that inflation would leave many workers with permanently lower wages, as in essence the central bank would be giving them a wage cut that their own employers probably would not have dared.

Do read the whole thing.

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