Steve Mohler
Editor’s note: This is the second in a series of columns from business analysts in the IUPUC Division of Business.
The topic of wage-price spiral is receiving attention in business news again, after a 40-year hiatus. However, initial research for this topic was surprising.
With a focus on the Columbus, Indiana Metropolitan Statistical Area (MSA) and surrounding areas, data for population, labor force, employment, and wages were required to develop an image of our local economic environment.
Surprising was the unemployment rate for the Columbus, IN MSA and surrounding counties, just 1 percent to 1.4 percent for December 2021!1 Looking back using multiple sources for the data, that is the only time these unemployment rates have been at 1 percent or below. These unemployment rates equate to one in 100 to one in 50 people in the labor force being categorized as unemployed.
This low unemployment rate follows the highest unemployment rate for the Columbus, IN MSA of 17.5% that occurred in April 2020.
Moving further into the investigation of the wage-price spiral, the United States average hourly earnings rate increased from $20 in 2006 to $28.37 at the end of 2019, a 2.9 percent annual increase. Then, average hourly wages for the United States increased from $28.37 in 2019 to $31.58 in February 2021, approximately a 5 percent annual increase and significantly higher than the pre-pandemic rate of increase.
For Indiana, the average hourly earnings rate increased from $19.76 in January 2007 to $26.05 by the end of 2019, a 2.4 percent annual increase3. Since the end of 2019, average hourly earnings increased by an average of approximately 3.6 percent. The recent increases for both the state and national appear to be accelerating.
The wage rate picture for Columbus is quite different than the United States and Indiana. During the January 2007 to December 2019 period average hourly earnings in Columbus increased an average of 2.9 percent, about the same as the national average. However, during the 2020/2021 time period, average hourly earnings in Columbus remained relatively flat from $26.04 in December 2019 to $26.06 in December 2014.
Labor force participation should be considered along with the unemployment rate and upward wage pressures. The labor force participation rate is calculated as the labor force (people willing and able to work) divided by the population 16 years of age and older.
For the United States, labor force participation peaked in 1998 at approximately 67% before declining to 63% in 2019. Since the pandemic, the U.S. labor force participation rate has recovered to 62% in 20225. A similar trend can be observed in Indiana with a labor force participation rate peak of 71% in 1995 before declining to 65% in 20196. The Indiana rate has remained around 63% since the beginning of the pandemic.
For the Columbus, IN MSA, the labor force participation rate increased from 64% in 2010 to 69% in 2016 before declining to 67% in 2019, the most recent MSA population data available. However, in 2020 the average annual labor force declined by 1,200 people followed by an increase of 400 people in 2021, a net decline of 800 people leaving the labor force in addition to the 2 percent decline before the pandemic. Preliminary estimates of the Columbus, IN MSA residential population indicate the population continues to grow. A reasonable conclusion then is the labor force participation rate continues to decline assuming no change in the age makeup of the population.
The topics of inflation, wage increases, stagflation, and inflationary expectations are now frequently discussed in national and local media. For baby boomers, the oil shocks of the 1970s along with double-digit inflation and the wage-price increase spiral may be memories of not-so-great times. Remember double-digit home mortgage rates in the early 1980s? The question becomes, are we there again? An easy answer is it depends (a great response for economists).
The global economy is again experiencing oil-related economic shocks. The world continues to experience regional military conflicts resulting in economic instability, loss of life and property, and uncertainty. And did we mention a global pandemic that caused increased product demand, supply chain disruption, lockdowns, and regional recessions with V-shaped recoveries?
However, current circumstances are different than the 1970s and early 1980s. Hopefully, we learned from past experience and have tools our government policymakers can use to reduce these economic risks.
We should also realize even with the extremely low unemployment rate and higher than expected average hourly earnings increases, the labor force participation rate appears 2 to 3 percentage points below the pre-pandemic levels. If these people who left the population in our workforce re-enter the labor force, the upward pressure on wages may be diminished, easing inflationary expectation and reducing the potential of a wage-price spiral.
