Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / The Productivity Payoff in Wages and Prices
Transcript
- Lucas: Look at the numbers from August, specifically the divergence between what workers are being paid and what prices are doing. Average hourly earnings hit thirty-seven dollars and eighty cents, which sounds robust, yet the core consumer price index stayed stubbornly high at three hundred thirty-seven point eight. Most people think the battle over wages is simply about unions or minimum wage laws, but the real friction here is productivity. Luna: Right, because if you are paying someone more but not getting more work out of them, that cost has to go somewhere. It usually ends up on the shelf tag. Lucas: Exactly. And this is where the Employment Cost Index gives us the clearer picture than simple wage surveys. The ECI was at one hundred seventy-nine in the second quarter, reflecting not just base pay but the rising cost of benefits and mandatory contributions. Companies aren't just raising salaries; they are spending more to employ you, period. When that total compensation cost rises faster than output per hour, unit labor costs spike. Luna: So even if my paycheck grew by four percent, if the company's efficiency dropped by two percent, they still have to raise prices to keep their margins intact. Lucas: Precisely. And we are seeing this play out in the service sector, which dominates our economy now. Services are hard to automate. You cannot write code to replace a nurse, a teacher, or a mechanic any more easily than you could five years ago. So when labor gets expensive, it stays expensive, and those costs are baked into the final bill for things like healthcare visits, auto repair, and housing services. Luna: That explains why grocery prices sometimes stabilize while the cost of getting your car fixed keeps climbing. One is goods, the other is heavily labor-intensive. Lucas: It does. And consider the PCE price index, which the Federal Reserve prefers, sitting at one hundred thirty-one point seven in July. The core PCE is at one hundred thirty point seven. These metrics strip out volatile food and energy to show the underlying trend. When that underlying trend refuses to break below two percent, it signals that the labor market is pricing in future inflation expectations. Workers demand raises to cover expected price hikes, companies grant them to keep staff, and then everyone raises prices again. Luna: It feels like a self-fulfilling prophecy where the fear of inflation drives the very inflation we are trying to tame. Lucas: It is a vicious cycle, but there is a nuance here that often gets missed. Not all price increases are bad. If a company invests in new software that makes its workers twice as fast, it can afford to pay higher wages without raising prices. That is good inflationary pressure, or rather, good deflationary pressure on goods. But right now, we are not seeing a massive wave of productivity-enhancing technology adoption in the small and medium enterprise space. Luna: Most local businesses don't have the capital to overhaul their entire workflow just to absorb a ten percent wage hike. Lucas: Correct. They pass it on. This brings us to the concept of real wages versus nominal wages. Nominal is just the number on the check. Real is what that number buys you after adjusting for inflation. In August, with wages up roughly four percent year-over-year and core inflation still ticking along, the real wage gain is marginal. For many households, especially those near the median usual weekly earnings of twelve hundred and four dollars, the purchasing power is barely moving forward. Luna: So you work harder, earn more dollars, but you can buy almost exactly the same amount of stuff as last year. It is exhausting. Lucas: It is. And this stagnation in real purchasing power changes behavior. Consumers start trading down. We see this in retail data where discretionary spending flattens. People stop buying premium brands and switch to store labels. They delay big-ticket items like home renovations or new vehicles. The economy doesn't necessarily crash, but it slows down because the engine of consumption is sputtering. Luna: I wonder if this is why we are seeing such cautious sentiment in the markets lately, despite the S&P five hundred being near seven thousand seven hundred. Lucas: The market is looking at corporate profits, which are still healthy for large caps. But the broader economy, the Main Street economy, is feeling the pinch. The Russell twenty indicates that smaller companies, which are more sensitive to labor costs and less able to offshore production, are underperforming. Their margins are getting squeezed from both sides: higher wages and stagnant demand. Luna: If the Fed sees these unit labor costs staying elevated, will they keep rates higher for longer? Lucas: They likely will. The bond market is already pricing this in. The ten-year breakeven inflation rate is at two point thirty-four percent, up slightly from yesterday. Investors expect inflation to persist because they know labor is the biggest input cost for most services. Until productivity jumps, the Fed cannot cut aggressively without risking a resurgence in price growth. Luna: So the burden falls on the worker to become more productive, but the tools to do that are scarce. Lucas: That is the structural challenge. We need better training, better technology integration, and perhaps a shift in how we measure work. But in the short term, you are stuck with the math. Your wage goes up, prices go up, and the gap narrows. It is a game of musical chairs where the chair is your standard of living. Luna: This is heavy. I think I need to step back for a second and just talk to you about the work we are doing here. Lucas: Sure, take a breath. Luna: Honestly, if walking through the economy with us has made something click, that is the link — buy me a coffee dot com slash fexingo. Lucas: Yeah, we appreciate it. It helps keep the lights on and the research sharp. Luna: Exactly. Back to the data, because there is another layer to this productivity puzzle. Lucas: Go ahead. Luna: What about the role of immigration and labor supply? If we had more workers, wouldn't that drive down wage pressure? Lucas: It would, but policy constraints limit that flow right now. In September twenty twenty six, the labor force participation rate is still recovering from pandemic-era shifts. Older workers are retiring earlier, and younger workers are delaying entry. This shortage of labor gives incumbent employees bargaining power, which pushes wages up, but it also means fewer hands on deck to increase overall output. Luna: So it is a supply shock on both the labor side and the goods side simultaneously. Lucas: Spot on. And global factors complicate it further. With global debt topping three hundred sixty-five trillion dollars, central banks worldwide are dealing with balance sheet issues. When the world's largest economies struggle with debt servicing, it creates uncertainty in trade flows. China saw a surprise jump in U.S. orders recently, which suggests some resilience in manufacturing, but shipping costs and geopolitical tensions add premiums to everything. Luna: So even if we solve the domestic labor issue, international logistics are keeping prices buoyant. Lucas: Yes. And this is why the Federal Reserve is so cautious. Kevin Warsh and other economists are sounding alarms about Treasury yields. When yields rise, borrowing costs for consumers and businesses increase. If a business has to pay four percent interest on a loan to expand, plus five percent in wage increases, they cannot grow unless they raise prices. Luna: It feels like the system is locked. How do we break out of this loop? Lucas: Usually, it requires a shock. Either a recession that forces wage cuts, or a technological breakthrough that massively boosts productivity. AI is supposed to be that breakthrough, but we are still in the early adoption phase. Most companies are experimenting, not deploying at scale. So we are stuck in this middle ground. Luna: Until the AI revolution hits the factory floor and the office cubicle, we are just managing decline in real wages. Lucas: Managing decline is too strong a word. It is managing transition. But it is a slow, painful transition. The key metric to watch next month is whether the Employment Cost Index continues to climb or stabilizes. If it stabilizes while wages remain high, it means companies are absorbing the cost, which is good for their bottom line but bad for their ability to hire more people. Luna: So hiring freezes might continue even if paychecks are getting bigger. Lucas: Exactly. It is a quality-over-quantity approach to the workforce. Companies want the best talent and will pay for it, but they won't expand the headcount until they see clear productivity gains. This leaves the average worker feeling undervalued and unseen. Luna: That sense of invisibility must be frustrating for anyone trying to plan for the future. Lucas: It is. And it highlights why financial literacy matters more than ever. Understanding that your nominal raise might not be a real raise helps you make better decisions about saving and investing. You can't change the macro environment, but you can optimize your personal balance sheet. Luna: So focus on assets that hedge against inflation, like Treasuries or maybe dividend stocks, rather than just chasing a higher salary. Lucas: Treasuries are tricky right now with yields fluctuating, but they are a safe harbor. Dividend stocks can provide income, though their valuations depend on the broader economic health. It is a balancing act. Luna: Balancing act seems to be the theme of the day. Lucas: It really is. From the Fed balancing growth and inflation, to businesses balancing wages and margins, to you balancing your budget. Everyone is walking a tightrope. Luna: A tightrope with no net underneath. Lucas: Precisely. And the wind is blowing pretty hard. Luna: Well, hopefully, we can find some solid footing before the week is out. Lucas: We will keep watching the data. The next update on productivity and wages will tell us if we are heading toward stability or another squeeze. Luna: Let's hope for stability. Lucas: Me too. Thanks for listening.