Saturday, April 23, 2011

Here Comes Wage Inflation

Paul Krugman has famously said he sees no inflation threat:
....there’s nothing here to suggest any reason to consider inflation a problem.
Recently he has been creating a bit of an escape hatch, in late March he wrote:
What would it take for me to decide that I needed another major rethink? A major surge in domestically-driven inflation — in particular, a surge in wages — would do it.

Well, the wage surge is starting. Late last year, Google gave all its employees a 10% pay increase.  Now Microsoft is giving a pay raise to all its employees. FT reports:
Microsoft’s 90,000 employees are to receive a company-wide pay increase, in the latest escalation of the war for talent among technology companies.

The pay increases, announced on Thursday in an internal e-mail by Steve Ballmer, chief executive, are aimed particularly at software engineers at the early stage of their careers and mid-level employees with expertise that is in short supply.
It makes sense that the pay raises are coming first in the high tech sector. In the high tech sector, you have competition for techies to design consumer software and business (i.e. capital goods) software. The high tech industry is in some sense the equivalent of oil in the natural resource sector. Because it faces demand from across the structure of production, it experiences increasing demand at almost all times, but especially during a period of serious central bank money printing. Since during those periods the capital goods sector will have the money to bid away software engineers from consumer businesses. The new central bank money will eventually work its way through the economy, but software engineers will be among the first to benefit and thus will generally be ahead of escalating price inflation.

2 comments:

  1. Actually that seems to me the opposite of an escape hatch. He shows that his beliefs are falsifiable. this way he offers his opponents a way to prove he's wrong.

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  2. Another comparison for high-tech employees were the factory workers in Wiemar Germany who got the wheelbarrows full of money. For whatever reason, their services were valued enough that they were close to the money printing presses.

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