In last month’s article, I addressed the topic of wage inflation and shifts in employment trends … and why residential rental investors should care. As a follow-up to that piece, let’s take a look at a growing point of view that urges economic experts across the political spectrum to rethink their long-held assumptions that bucking inflation necessarily means increasing unemployment.
I find this to be compelling. The upshot is that increased wages
and employment gains are not drivers of inflation.
Traditional Economic Theory
The Bureau of Labor Statistics’ new jobs report, released early this month, was a surprise to nearly all economic analysts. The unemployment rate fell to 3.4 percent — its lowest level since 1969 — and 517,000 new jobs were added in January across a wide range of industries. That was more than double the 190,000 new jobs Wall Street analysts had predicted would emerge.
Those startling developments prompt the prevailing economist response to be negative as their mantra is … an important way to fight inflation is to weaken the labor market. The theory is that companies compete for workers in a strong labor market by offering increased wages. In turn, higher wages lead to more expensive products … thereby contributing to inflation.
That demonstration of “conventional wisdom” is a product of the Phillips curve … an economic theory dating back 65 years that inflation rises as unemployment falls. The theory claims that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment. Restated, higher inflation is associated with lower unemployment and vice versa.
Reportedly, this theory is generally embraced by economists at the Fed and their independent advisors. This was indicated earlier this month when Fed Chair Jerome Powell said for the first time that, “the disinflationary process, the process of getting inflation down, has begun. Still, the reality is we’re going to react to the data, so if we continue to get, for example, strong labor-market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in.”.
Not so, say an increasing chorus of economic experts! Residential real estate investors and investors in general need to understand this dissent as signs point to continued strength in the labor market. As evidence, the U.S. Chamber of Commerce recently reported the Virginia Worker Shortage Index shows 54 available workers for every 100 open jobs! Employers will compete to close that gap further slashing unemployment.
The skepticism is directed toward economists who have embraced the Phillips curve and made it the dominant macroeconomic policy in the 20th Century, that is economic growth causes prices to rise … and they equate rising prices with inflation.
Naysayers define inflation as currency devaluation … which means it has nothing to do with economic growth, and frequently nothing to do with rising prices. In fact, inflation has eaten into wage gains … not the other way around. In many cases worker raises have been cut, if not wiped out altogether, by price increases.
Skeptics also point out the major contradiction to the theory during the 1970s. The economic hallmarks of that period were high levels of both inflation and unemployment plus stagnant economic growth. The U.S. economy posted six consecutive quarters of GDP while inflation surged by 300 percent. An economic model is ultimately good only if you realize reliable explanations and forecasts over time. History shows the relationship between inflation and unemployment is not absolute.
My business planning for 2023 sides with the skeptics.
Inflation drives rising pay … not the reverse.
Inflation is currency devaluation.
Good economic times occur in concert with greater earnings.
Takeaways for Virginia Landlords
There’s considerable upside potential for job growth as the Virginia Worker Shortage Index gap of 54 available workers for every 100 open jobs shrinks.
Likewise, I believe it is abundantly clear that wage inflation is a fact of life which will continue at least through 2023 as strapped employers compete to attract and retain quality workers … offering signing-on bonuses and compensation boosted to pre-pandemic norms. Likewise, blue collar workers and those employed in the trades demand sizable financial inducements.
Wage inflation drives growth as more workers are employed and produce
goods and services that generate profits in excess of employee compensation.
So, how is wage inflation and rising employment likely to affect residential landlords like you and me? I’m convinced there will be robust gains in employment, wages and spending power in 2023. The net effect for residential rental investors will be an expanded tenant pool of workers enjoying sizable bumps in income. In turn we will enjoy enhancements in rental income, tenant quality and appreciation in asset values.