Is inflation driving up wages in Minnesota?

Minnesota workers under 55 are having a new experience in 2022: a period of stubbornly high inflation.

When the consumer price index climbed to 9.1% in June, it was the highest level of inflation in four decades. Despite the Federal Reserve’s efforts to bring it down by raising interest rates, inflation stood at 8.5% in July and 8.3% in August.

The Federal Reserve doubled down on its inflation-fighting strategy on Sept. 21 and approved a third straight interest rate hike of three-quarters of a percentage point.

At the same time, wages have increased. Are these wage increases really fueling inflation? Or is persistent inflation pushing workers to demand more wages so they can pay their bills?

“Prices are rising faster than wages,” says labor economist Aaron Sojourner. “So in a sense wage growth is slowing [the rate of] inflation. Other factors are driving up prices more than wage increases [are].” Food and energy costs have risen faster than wages, and consumer demand and supply chain bottlenecks are affecting market prices.

Minneapolis-based Sojourner, a former professor at the University of Minnesota, works for the WE Upjohn Institute for Employment Research.

In July, wages in Minnesota rose 5.6% from the previous July. In August, these average hourly earnings were up 5.8% from a year earlier. Over a two-year period, August wages rose 9.2% in Minnesota, according to data released by the state.

With inflation stuck in the 8-9% range over the summer, many low- and middle-income workers have become acutely aware that they are losing ground financially.

In response, do employers take high inflation into account when setting pay levels?

When companies raise wages, Sojourner says they’re trying to solve two problems. “One is to recruit the people they want, and the second is to retain the people they want,” he says. “Inflation is playing in there in the background.”

The supply of workers for a particular job affects what employers will pay to fill their positions, but high rates of inflation affect where workers choose to work and the demands they place on current and new employers.

The stigma attached to changing jobs has fallen by the wayside. Workers, affected by inflation, wield their power in a tight labor market.

Steve Grove, commissioner of the Minnesota Department of Employment and Economic Development (DEED), says inflation affects worker behavior in several ways.

“Workers have unprecedented power in today’s labor market, and they are exercising it,” says Grove. Minnesota’s unemployment rate hit an all-time low of 1.8% in July and hit 1.9% in August.

“When you have a worker-centric economy and workers have decision-making power, companies are put in a tough spot and they have to raise wages to keep up with their competitors,” Grove says. “We find that a lot of workers don’t worry as much about moving from job to job because the market is so hot,” he says. For example, says Grove, some factory workers will move to another company to increase their wages by $2 an hour.

Meanwhile, many companies will raise wages to avoid losing employees in an extremely tight labor market. “Are they doing this because of inflation? Overview, they are, because the employees are not [taking] jobs where they can’t get paid enough to support themselves,” Grove says.

Grove reads employment reports produced by government agencies, but it constantly gets first-hand information from employers. “When you walk into some of the smaller towns, the employers know each other and don’t want to cannibalize their respective workforces,” Grove says.

He spoke to employers who said, “We don’t want to steal employees from ourselves, we need to attract more talent to move to our city or come to our state. Grove says the company’s owners tell him they don’t want to “fight wage wars.”

Joe Mahon, regional outreach manager for the Federal Reserve Bank of Minneapolis, points out that there were labor shortages in Minnesota before the pandemic.

“For a long time, companies have been concerned about worker downtime,” Mahon says. However, for six to seven years before the pandemic, wages grew only modestly in Minnesota.

When employers raise wages, they try to retain employees and attract new workers. Although they may not have high inflation in mind, soaring consumer prices are a major concern for many workers. With a very low unemployment rate, many workers are looking for new employers to increase their salary.

This pattern is at odds with the Phillips curve, which you may have studied in economics class. “There is a trade-off between unemployment and inflation,” says Mahon. “When unemployment gets too low, it starts to drive up wages. It drives up the cost of goods. In a bad scenario, it can lead to runaway inflation. Workers start expecting everything to cost more expensive, which increases their wage demands.This forces employers to pass on these costs.

Minnesota’s tight labor market conditions are even more pronounced in 2022 than they were before the pandemic began. In addition to unemployment below 2%, Minnesota’s labor force participation rate fell from 70.4% in August 2019 to 68.25% in August.

Mahon says wages are now rising in many professions. This was evident in a survey of professional services salaries conducted by the Minneapolis Fed in mid-2022. “We had a significant share of companies indicating that they were increasing salaries by 6% to 10%, or 10% or more, compared to what we usually see in good years,” Mahon said.

At recruiting agency Robert Half, Kyle O’Keefe, Minneapolis District President, says companies are being forced to pay higher wages because of the “scarcity of talent” in the market. People are also comfortable leaving their current employer. Robert Half released a survey in June that showed 31% of respondents in the Minneapolis market planned to look for a new job in 2022. In the national survey results, 65% wanted to change jobs for a raise. of salary.

“Candidates are well educated on salary inflation,” O’Keefe said. “They have a higher cost of living, so they’re going to achieve that when they set their compensation expectations.”

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