(Yahoo!Finance) - President Joe Biden is at war with “junk fees” and corporate price hikes, a campaign likely to intensify as Biden woos voters and tries to win reelection.
A new Biden task force will supposedly crack down on what the White House calls “unfair and illegal pricing.” One new initiative is an $8 cap on credit card late fees. Biden advisers say a flurry of attacks is coming on other sneaky price hikes imposed by airlines, healthcare providers, and shrinkflation practitioners selling ever-smaller packages.
Well, hooray. Corporations surely filch every penny they can from unsuspecting shoppers. But one of the biggest sources of persistent inflation is something Biden really can’t complain about: rising wages for American workers. And the more Biden redirects production back to America — a key priority of his administration — the more American shoppers will have to absorb higher labor costs.
“Manufacturers are affected by rising labor costs, and their costs are going up,” says Oliver Rust, head of product for Truflation, a real-time price-tracking service. “Onshoring will increase the strength of the US economy, but it will have an impact on higher cost base because producers will be using more expensive talent.”
The spate of inflation that kicked off in 2021 had several causes. Many goods became scarce due to COVID-related supply chain kinks and surging demand by consumers stuck at home. Congress passed $6 trillion worth of stimulus in 2020 and 2021 that pumped gushers of money into the economy. As COVID receded, demand shifted from goods to services that consumers had been deprived of, pushing up the costs of travel, restaurant meals, and entertainment.
Rising labor costs are part of the story too, and once labor costs go up, they tend to stay up. It’s a good thing that massive amounts of government aid quickly bounced the US economy out of a COVID recession and triggered a strong recovery. But that also exacerbated labor shortages in many industries, which persist.
When workers grow scarce, employers have to pay them more, which is exactly what has happened since COVID, as the chart below shows. For 10 years prior to the COVID outbreak in 2020, compensation costs, including wages and benefits, rose an average of 2.7% per year. That jumped to 3.6% in 2020, 4.7% in 2021, 7.2% in 2023, and 6.9% in 2024. The latest readout, a 6.5% jump in compensation costs in the fourth quarter of 2023, was well more than double the pre-COVID average.
Some of that represents rising benefits costs, but most of it is pay. That trend is similar. During the 10 years before COVID, earnings rose by an average of 2.5% per year. Since 2020, earnings have risen by an average of 4.8% per year.
People don’t feel like they’ve been getting big raises because for part of that time since 2020, inflation went up by more than earnings. Workers fell behind, on average, relative to prices. But that has since evened out and earnings once again outpace inflation.
Wages are “sticky,” which means they tend to go up but not down. Employers might be reluctant to raise pay, but they’re even less likely to cut it, because workers leave, and in a tight labor market it’s hard to get replacements. That makes rising pay for American workers a stealthy source of inflation.
Biden can hardly blast corporations for raising pay too much. In fact, he’s done exactly the opposite, joining a picket line in Michigan last year and siding with unionized autoworkers demanding robust raises. That strike worked. The union got most of what it was asking for and most non-union automakers raised their own wages to keep workers happy and forestall unionization efforts. Biden even bragged about helping set a “new standard” for blue collar workers.
But there’s no way around the fact that when American labor costs go up, prices are likely to go up too. There are some exceptions. If productivity rises by as much as labor costs, or more, that means workers are getting more done relative to cost, which might keep prices stable. But there’s no reason to think a 30% raise for autoworkers through 2028 will automatically bring a 30% improvement in productivity. If the productivity gain is less, automakers can either try to pass higher labor costs on to consumers through higher prices or eat lower profits and bear the wrath of shareholders.
Most companies also try to manage labor costs by adopting automation and new technology, which will obviously continue as artificial intelligence and other advanced systems get cheaper and more sophisticated. But US production will almost always cost more than in lower-cost countries such as China, India, Vietnam, and Mexico since American wages, as well as regulatory costs, are far higher. That means any move to re-shore or ramp up US production of stuff mostly made overseas is going to raise costs for anybody who buys the American-made products.
Taiwanese semiconductor giant TSMC is already struggling with costs that are four times higher at a plant it’s building in Arizona than they are at home, and that’s only at the construction stage. The cost of building an electric vehicle in the United States is about 50% more than in China, one reason the profitability outlook for EVs is dim. Solar panels made in the United States cost nearly twice as much as those from China.
Biden has signed legislation to boost the US production of all those things to better secure American supply chains and claim some turf on the industries of the future. That’s a worthy goal, but if it works, it can only push prices higher, until scaling and innovation help reduce the US cost disadvantage. You won’t hear Biden say it, but one person’s price gouging is another person’s livelihood.
By Rick Newman · Senior Columnist
Rick Newman is a senior columnist for Yahoo Finance.
