Jobs and the Future of Work

Wage-price spirals to layoffs – how to make sense of labour market uncertainty

Wage price spirals are unlikely despite speculation.

Wage price spirals are unlikely despite speculation. Image: Unsplash/Airam Dato-on

Coram Williams
Chief Financial Officer and Member of the Executive Committee, Adecco Group
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  • Inflationary pressure in an employee’s market has led some to speculate that a wage price spiral might ensue, while layoffs and redundancies add to market uncertainty.
  • Supply chain issues have more to do with rising inflation caused by the COVID-19 pandemic and exacerbated by the war in Ukraine.
  • An economic slowdown cast additional doubt on a wage price spiral. Coupled with the war in Ukraine, Europe’s labour market is set to endure a slow recovery and return to pre-pandemic employment levels.

As inflation continues to rise since the pandemic onset, workers seek higher wages to deal with the blow to spending power, leading to media speculation that a wage price spiral will ensue if higher salaries are passed to the consumer in a potentially never-ending cycle. However, in a complicated environment of inflationary pressure and labour market uncertainty, several important considerations could help employers thrive in the current climate.

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Broken supply chains

Firstly, given the wider macroeconomic outlook, there’s a reasonable argument that a wage price spiral isn’t as likely as many believe. There is little evidence that wage increases have so far played a significant role in the recent rise in inflation seen across various economies. In fact, disruptions to supply are the more likely explanation.

Over the last two and a half years, the pandemic has upended supply chains. Factory shutdowns in different countries have left many companies struggling to source alternative supplies of intermediate goods while simultaneously trying to deliver according to the reconfigured patterns of demand brought on by national lockdowns.

Earlier this year, Russia’s invasion of Ukraine again shocked the global economy, especially in Europe, disrupting energy and food supplies. As the manufacture and transport of all goods use energy, higher energy costs inevitably translate into higher prices.

While it is hard to put a timeline on these sources of inflationary pressure, they are likely transient. Many companies have already reconfigured their supply chains in the wake of COVID-19, seeking greater resilience by reducing their reliance on single suppliers. In addition, countries are now trying to adapt their energy mix.

As inflationary pressure eases, the impacts of current wage increases could feed through into inflation through higher demand and higher costs for manufacturers. Businesses could raise prices for consumer goods and services to maintain their profit margin. One reason to hope this will not happen is the recent proliferation of regional and bilateral trade agreements, given evidence that import competition reduces the extent to which wage rises will feed through into price rises.

Tight regional labour markets

A more fundamental reason to doubt a wage price spiral is the growing expectation of a global economic slowdown, which would take some heat out of "tight" labour markets - where a shortage of workers is driving up wages. How tight labour markets currently differ markedly from region to region, according to recent research by the Adecco Group and Economist Impact.

The invasion of Ukraine has especially set back Europe’s labour market, reversing expectations that pre-pandemic employment levels would return. Now, only an optimistic scenario sees recovery before 2024. In the Middle East and Africa, that recovery is due around 2025 and in South America, even later.

Asia is closer to getting back to pre-COVID-19 levels, employment predicatively resuming its pre-pandemic state this year. So is the United States, where we foresee this happening in 2023. Although this is positive for both regions, they also face the biggest risk of a wage price spiral.


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The wage price spiral in context

Employers should view the upward pressure on wages in the broader context of the exceptional post-COVID-19 labour market. According to the United States Bureau of Labour Statistics, workers are quitting at a 25% greater rate than before the pandemic. Many of these workers then switch to different industries.

The impacts vary across sectors and while the news is dominated by hiring freezes and layoffs, certain workers are currently in higher demand almost everywhere, worldwide; in particular, “skilled non-professionals,” such as machinists and welders.

Amid the variations, the overall story is a shift in power from employers to employees. Although this manifests in wage demands, it also puts workers in a stronger position to ask for changes in working practices or press their employers to support social causes. The Adecco Group’s upcoming research (due for publication in October 2022) finds that salary is far from the top concern for workers who are engaged and happy with their current employer. Far more important are work-life balance, good company culture and flexibility.

Employers should look for opportunities in this shift in the balance of power as it challenges them to find creative new ways to make their workforce happier and more productive. For example, Spotify credits its “work from anywhere” policy with its modest turnover rate.

The bottom line for employers is the need to take a more expansive view and be prepared for many scenarios. During the pandemic, employers had to adapt to ongoing uncertainty. Those who did best displayed the most agility, flexibility and resilience, qualities that will serve them well in this uncertain macroeconomic environment.

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The views expressed in this article are those of the author alone and not the World Economic Forum.

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