08/21/2023 07:00 PM EDT
PRODUCTIVITY POINTS — Prices have gone up a lot over the past couple of years, which, unless you’re living under a rock, you’ve noticed. Wages, too, have surged and are now growing faster than inflation. But the Federal Reserve has kept a wary eye on worker income for fear that it might lead to a resurgence in inflation.
If you read that paragraph, you might think, despairingly: do we really have to worry about wages growing too fast? The good news is that the answer is no, not necessarily. But the economy does need a special ingredient: productivity growth. That is, more output from the same inputs.
“The absolutely most critical piece of information that we need to glean is, what is happening to the productivity growth rate?” Chicago Fed President Austan Goolsbee told Nightly recently. “The question of, ‘Is this rate of wage inflation consistent with this rate of price inflation?’ That cannot be answered unless you say what the productivity growth rate is.”
A reductive but useful way of thinking about wage growth is productivity growth plus inflation. So if you have 4 percent wage growth and 1 percent productivity growth, that implies 3 percent inflation — above the Fed’s 2 percent target. But if productivity growth is higher, you can have higher wages without rapid price increases.
And there is more good news. Maybe.
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