Editor Pick – Inflation and unit labor costs: A phantom menace?
The fact that unit labor costs (UCL) in Q4 2006 grew at an annual rate of 6% creates fears that higher compensation costs will pass through to prices.
Jared Bernstein observes that this scenario seems unlikely. While in the past the correlation between inflation and UCL was very high, during the last decade it has been very weak. He explains this with “the fact that ULCs have recently been driven up by high-end compensation components (like bonuses and exercised stock options) that firms are less likely to pass through to prices, and the fact that inflationary expectations (the path that most people expect inflation to follow) have been less moved by swings in compensation.”
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