Is Inflation Driving Up Wages in Minnesota?
Minnesota workers under 55 are living through a new experience in 2022—a period of stubbornly high inflation.
When the consumer price index spiked at 9.1% in June, it was the highest level of inflation in four decades. Despite the Federal Reserve’s efforts to beat it down by raising interest rates, inflation stood at 8.5% in July and 8.3% in August.
The Federal Reserve doubled down on its inflation-fighting strategy on Sept. 21 and approved a third consecutive interest rate increase of three-fourths of a percentage point.
Simultaneously, wages have been rising. Are those pay hikes actually fueling inflation? Or is persistent inflation causing workers to press for more pay so they can pay their bills?
“Prices are increasing faster than wages,” says labor economist Aaron Sojourner. “So in a sense wage growth is slowing [the rate of] inflation. Other factors are driving prices up higher more than wage increases [are].” Food and energy costs rose more rapidly than wages, and consumer demand and supply chain bottlenecks affect market prices.
Minneapolis-based Sojourner, formerly a University of Minnesota professor, works for the W.E. Upjohn Institute for Employment Research.
In July, wages in Minnesota were up 5.6% compared with the previous July. In August those average hourly earnings were up 5.8% over the previous year. Looking at a two-year period, August’s wages were up 9.2% in Minnesota, according to data released by the state.
With inflation stuck in the 8% to 9% range over the summer, many low- and middle-income workers became abundantly aware that they’re losing ground financially.
In response, are employers taking high inflation into account when they set compensation levels?
When companies boost wages, Sojourner says they are trying to solve two problems. “One is recruiting people they want, and the second is retaining people they want,” he says. “Inflation plays into that in the background.”
The supply of workers for a particular job affects what employers will pay to fill their openings, but high inflation rates affect where workers choose to work and the demands they make of current and new employers.
Stigma over job hopping has fallen by the wayside. Workers, feeling the bite of inflation, are wielding their power in a tight labor market.
Steve Grove, commissioner of the Minnesota Department of Employment and Economic Development (DEED), says inflation affects worker behavior in several ways.
“Workers have an unprecedented amount of power in today’s labor market, and they are wielding it,” Grove says. Minnesota’s unemployment rate reached a historic low of 1.8% in July and ticked up to 1.9% in August.
“When you have a worker-centric economy and workers have decision-making power, firms are put in a tough spot, and they do have to raise wages to keep pace with competitors,” Grove says. “We’re seeing a lot of workers not worried as much about hopping from job to job to job because the market is so hot,” he says. For example, Grove says, some factory workers will move to another firm to boost their pay by $2 an hour.
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Meanwhile, many companies will hike wages to avoid losing employees in an extremely tight labor market. “Are they doing this because of inflation? Big picture, they are, because employees aren’t [taking] jobs where they can’t get paid enough to afford their lives,” Grove says.
Grove reads the employment reports produced by government agencies, but he’s constantly getting firsthand information from employers. “When you get into some of the smaller towns, employers know each other, and they don’t want to cannibalize each other’s workforces,” Grove says.
He’s talked to employers who’ve said, “We don’t want to be stealing employees from each other, we need to attract more talent to move to our town or come to our state.” Grove says company owners tell him they don’t want to be “slugging it out in wage wars.”
Joe Mahon, regional outreach director for the Federal Reserve Bank of Minneapolis, points out that there were labor shortages in Minnesota before the pandemic.
“For a long time, businesses have been concerned about the unavailability of workers,” Mahon says. However, for six to seven years before the pandemic, wages only rose modestly in Minnesota.
When employers raise wages, they are trying to retain employees and attract new workers. While high inflation isn’t uppermost in their minds, the spike in consumer prices is a major concern of many workers. With very low unemployment, many workers are looking for new employers to boost their pay.
That pattern is at odds with the Phillips curve, which you may have studied in economics classes. “There’s a trade-off between unemployment and inflation,” Mahon says. “When unemployment gets too low, it starts to drive up wages. That drives up the cost of goods. In a bad scenario, that can lead to runaway inflation. Workers start to expect everything is going to cost more, and that pushes up their demands for wages. That causes employers to pass those costs through.”
Minnesota’s tight labor market conditions are even more pronounced in 2022 than they were before the onset of the pandemic. In addition to unemployment at less than 2%, Minnesota’s labor participation rate fell from 70.4% in August 2019 to 68.25% this August.
Mahon says wages are now rising in many occupations. That was evident in a professional services wage survey the Minneapolis Fed conducted in mid-2022. “We had a significant share of businesses indicating that they were increasing wages by 6% to 10%, or 10% or more, compared to what we usually see in good years,” Mahon says.
At the Robert Half staffing agency, Kyle O’Keefe, Minneapolis district president, says businesses are forced to pay higher wages because of the “scarcity of talent” in the marketplace. People also are comfortable leaving their current employers. Robert Half released a survey in June that showed 31% of respondents in the Minneapolis market planned to look for a new job in 2022. In the national survey results, 65% wanted to switch jobs to get a salary boost.
“Candidates are well-educated on wage inflation,” O’Keefe says. “They have a higher cost of living, so they are going to manage to that when they set their expectations of pay.”