Millionaire Explains Why Asking For Wage Raises During Inflation Won't Work

As reports indicate that major U.S. banks are holding record amounts of money while Americans' personal savings are at their lowest in about 14 years, some are advising against raising wages in the midst of record-high inflation.

Paul Kedrosky, a millionaire investor and partner at SK Ventures, tweeted today about suspected confusion between wages and prices—arguing that raising wages with inflation is not a rational mode of thinking.

Will Wage Increases Make Inflation Go Up?

He admonished those who consistently warn that wage increases will make inflation go up, calling them "nonsensical" and "not born out by historical wage-price relationships, where, while there is a relationship, it is messy and nonlinear."

Should Wages 'Catch Up' To Inflation?

On the other hand, he noted, individuals who demand that wages must "catch up" to current inflation are also in the wrong due to the expectation that there will be economic consequences, referencing data from the U.S. Bureau of Industry and Security.

"This is a misunderstanding," Kedrosky said. "First, wages are sticky upward. People are reluctant to see their wages cut when inflation is low, but they demand they go up when the reverse is true—especially if it's materially above what recency bias they feel.

If people demand that wages remain sticky when prices fall, and rise if prices go high enough, then they will, at the margin, lay off more and/or hire less.
Paul Kedrosky

"Second misunderstanding is from one cause of recent low inflation: the entrance of some very large export economies into the global trade system, driving down prices in developed economies. This is now unwinding, introducing structural changes wrt price levels."

Aside from saying that broken wage-price correlation "and its unlikely persistence" is only usually noticed by most consumers when levels breach 5 percent or more, Kedrosky said companies get around wage illiquidity via layoffs.

"If people demand that wages remain sticky when prices fall, and rise if prices go high enough, then they will, at the margin, lay off more and/or hire less," he said. "We are seeing some of that now."

Inflation is 'Biggest' American Issue

Concerns about inflation and wages come as the United States has entered its first bear market since 2020. The most recent previous bear market started on February 19, 2020, and lasted barely over a month, which was less than bear market durations in the 2000s.

What is a Bear Market? See this video.

Simultaneously, a World Bank representative has simultaneously said "things have gotten, unfortunately, much worse than what we expected," adding that the anticipated slowdown has become "more pronounced."

New York Stock Exchange
Traders work on the floor during the opening bell on the New York Stock Exchange June 15, 2022, in New York as the U.S. Federal Reserve is poised to raise borrowing costs due to rising inflation. Timothy A. Clary/Getty Images

In May, the Pew Research Center reported that seven in 10 Americans viewed inflation "as a very big problem for the country," and bigger than the affordability of healthcare and violent crime at 55 and 54 percent, respectively.

Between 1990 and 2021, only approximately 1 percent of the general American public identified inflation as the major issue facing the United States, according to Gallup research, though that number shot up to 18 percent in May.

That data came one month after 32 percent of surveyed Americans identified inflation, or the cost of living, as the biggest issue plaguing their families. About 10 percent of respondents blamed gas prices and energy costs as their biggest economic hindrance.

Americans are pointing at President Joe Biden and his administration for their handling of the major issues foreign and domestic, including the Russia-Ukraine war and the state of the economy.

A June 8 Quinnipiac poll has Biden in the red when it comes to his response in relation to coronavirus and the Russian invasion of Ukraine. And while 59 percent of Americans surveyed disapproved of Biden's handling of gun violence, most polled—at 64 percent—viewed the economy as his weakest area of governance.

What Do Politicians Think The Biggest Issue Is?

Republicans

That same Quinnipiac poll indicates that 46 percent of Republicans viewed inflation as the country's most pressing issue, followed by immigration.

Democrats

On the other side of the aisle, 31 percent of Democratic voters polled said gun violence was the nation's biggest issue, followed by inflation at 15 percent and election laws at 11 percent.

Independents

About 37 percent of independents reported that inflation was the biggest issue at 37 percent, followed by gun violence at about 16 percent. No other issue reached double-digit responses.

"Economic concerns driven by inflation take President Biden back to his lowest job approval number and give him the worst assessment of how he is handling the economy ever," Quinnipiac wrote.

Newsweek reached out to Kedrosky for further comment.