Figure 1: Average unit wage cost inflation in developed economies

There is understandably much discussion at present about a cost-of-living crisis, stagflation strains and global recession risks. But are there any crumbs of comfort that suggest these risks are over-stated? There are, and they lie in the recent global dataflow for wage inflation and productivity.

Specifically, rates of unit wage cost inflation for Q4 2021 in most major economies have been benign and a long way shy of rates that have preceded previous phases of stagflation and recession over the past 50 years (see figure above). Much of the 1970s, for instance, was associated with high levels of labour bargaining power, double-digit rates of nominal wage inflation, monetary policies that paid little heed to inflation, as well as tepid productivity growth.

In fact relatively impressive rates of productivity growth of late are one of the key reasons for why unit wage cost inflation is so benign. In the US in particular output per hour worked has been accelerating in recent years. Even more impressively much of this improvement has been driven by underlying gains in total factor productivity (TFP) growth. Indeed data from the San Francisco Fed suggest that business sector TFP growth averaged 4.2% in 2021, its fastest pace for nearly 70 years (see figure below).

Figure 2: US labour and total factor productivity growth

Forecasting the future evolution of TFP growth is fraught with problems. But insofar as recent productivity gains have been a function of efficiencies that are rooted in new technology investment there are some positive omens. Most notably, recent surveys suggest a very high proclivity from companies at present to invest in information technology. This is not what one expect to see if productivity – and broader economic growth - rates were on the cusp of a major deceleration phase.

Figure 3: UK and US survey evidence suggests firm technology investment intentions

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.