8 AUG, 2022
By Ulrike Kastens
During the past 50 years, a great achievement of the modern social sciences has been the establishment of more solid micro-level foundations to macroeconomics. Gone were the days of just observing correlations and trying to guess at potential causal relationships from the safety of the ivory tower. Especially after the forecasting failures of the 1970s, theorists and practitioners increasingly wondered how real-world households, workers and firms make decisions and how these decisions might interact at the macro level. Occasionally, that involved not just using insights from microeconomics and related social sciences, but even asking real people!
Our “Chart of the Week” highlights the latest results of one long-running survey, that has been particularly useful during the recent crisis, the European Commission’s Business and Consumer Survey (BCS). Once every quarter, it asks representative samples of firms from a range of different sectors which factors are holding back economic activity. Early on in the pandemic, the main reason to limit manufacturing was low demand. Then, unavailability of material and equipment followed. Just as these bottlenecks eased, though, growing numbers of respondents have been complaining about labor shortages, and not just in manufacturing. As our chart shows, this is even more so in services. Even in countries such as Italy and Spain, we are seeing the highest levels of perceived labor scarcity in almost 20 years of available data for their service sectors.
Clearly, there is less slack in labor markets than before the pandemic. This raises the likelihood of higher wage agreements, which in turn means inflationary pressures will spread even further. Just how and by how much will no doubt be a matter of much debate in comings weeks and months. Inevitably, this entails questioning of many shared market assumptions. Ricardo Reis, a pioneer in the study of how periods of low inflation can change the incentives of workers and households to pay attention to it, recently wrote an excellent primer setting out many of the issues likely to be re-examined. If we have one quibble with it, it is that especially in parts of continental Europe, trade unions may in coming pay rounds have the ability and the incentives to look beyond the erosion of real wages, due to high inflation, and push for even more.
Sometimes, that means revisiting lessons that had been forgotten by the latest generation of investors and policymakers.