Fiscal Support and Worker Power: Shaping the Economic Landscape
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Fiscal support
Huge government deficits in the 1970s may not have caused the initial inflation spike, but they undoubtedly amplified it. So, too, did the massive interventions at the start of the Covid pandemic and the “excess savings” pile they helped create.
That story is now clearly changing. The US fiscal position is tightening and in the short term, a resumption of student loan repayments is symptomatic of Congress’ reluctance to allow further big spending packages. In the EU, the Stability and Growth Pact – the rules that mandate fiscal responsibility by European governments – is coming back to the fore. As we wrote a few months back, there’s a growing recognition that the rules need to be more flexible, especially when it comes to public investment. However, political uncertainty in the Netherlands and Spain could undermine an agreement on the new rules. In this scenario, and in the absence of yet another activation of the escape clause, eurozone fiscal policies would become more restrictive.
That said, after a decade of austerity and ultra-low interest rates, particularly in Europe, the lesson from both the pandemic and the Ukraine War is that fiscal policy can be a powerful lever. Met with a fresh, unexpected shock, we suspect the bar to another large fiscal intervention is lower than it might have been in the 2010s.
Worker power and unionisation
Trade unions were a powerful force in the 1970s, a sharp contrast to what we see today. The share of employees who are members of trade unions has decreased markedly, a trend that’s gone hand-in-hand with the decline of manufacturing across the West.
But we need to make a distinction between trade union membership (which is generally low in Europe, at least according to official data) and collective bargaining coverage. The latter is the proportion of employees whose wages are centrally negotiated, and in Europe, that’s often in excess of 90% and has typically changed much less since the 1980s. Negotiated wage growth is the highest in 30 years, albeit it has tracked well below headline inflation, and this looks more like a "catch-up" than any kind of wage-price spiral.
Even in countries where collective bargaining is unusual (the US and UK), there are hints that worker power is growing. On a one-year rolling basis, the number of strike days is at its highest level since at least the early 2000s in the UK and US. That doesn’t mean union membership is increasing per se, not least because the power of trade unions under law in the likes of the US and UK has reduced over time. But it does suggest workers feel they can push for inflation-busting pay rises.
In short, regardless of whether unionisation increases over the coming years, the pandemic has shown that wage growth can still rise quickly if there are widespread worker shortages. This is changing, and most countries have seen participation rates return to pre-Covid levels. And even where they haven’t (as in the UK), there are signs that worker supply is improving. We think economic slack will increase as rate hikes increasingly begin to bite.
Still, the pandemic also gave us a flavour of how the ageing populations we see in many developed economies could actually be inflationary in the medium term. In the US in particular, we saw millions of people retire in a very short amount of time. And that undoubtedly contributed to worker shortages which fed through to higher wage growth. Many economies were already starting to see this in certain industries (e.g. long-distance lorry driving) before Covid-19, and worker shortages are likely to become a persistent issue over the coming years.
The ability of workers to protect real wages in future inflation shocks may well increase. That said, it’s possible that some of the labour scarcity associated with ageing will be countered by technological advances, not least Artificial Intelligence.
