There is the potential of a strike by freight rail workers as early as Friday, September 16. This action would be devasting to the economy, mostly by creating shortages that will cause prices to skyrocket. Actions like this should be expected, though, when inflation is near 9% and the government keeps paying people to not work.
The hope is that a strike can be avoided by having the rail companies and the workers reach an agreement. The Biden Administration appointed the Presidential Emergency Board (PEB) which released recommendations for a settlement. They offered a whopping 24% wage increase over a five-year period.
A number of unions have accepted this very generous offer. But several unions have not. They say in addition to the large wage increases they want more. They want a reduction in hours worked and more paid time off. From the rail companies’ view, the 24% increase in labor cost is already too heavy of a burden. Reducing hours worked would add to the increased labor cost.
If a strike does occur, the Biden Administration can declare a National Emergency which would force labor back to work. Politically that is a very divisive tool and one that President Biden would like to avoid.
The reason that labor is taking this position is that they fear continued high inflation and they feel empowered when negotiating mostly because of the current labor shortage. In other words, it is essentially Biden Administration policies that have led us to this crucial point.
The Biden Administration and the Federal Reserve caused most of the inflation and created the labor shortage. Today’s inflation is a result of Bidens’ war on fossil fuels which reduced domestic production and drove energy prices up. It is also due to excess demand caused by the federal government spending nearly $7 trillion more than they brought in from tax revenue in fiscal years 2020, 2021 and 2022.
Additionally, the federal government continues to pay people not to work. That creates a labor shortage and drives up wages. There are currently over 11 million job openings and about 6 million unemployed people. This causes wage inflation.
The Federal Reserve’s shockingly irresponsible Monetary Policy in 2021 and the first quarter of 2022, has also created excess demand and inflation. The Fed vastly increased the money supply and kept interest rates near zero during that period.
Today labor says inflation is running near 9% and the forecasts say inflation will stay at the 5% range for the next several years. Labor reasons that their wages must increase by at least 5% annually over the next few years just to keep up with inflation.
Additionally, labor reasons, working conditions have not improved and the labor shortage means they can negotiate for better working conditions since the rail companies will not be able to find other workers.
This is a clear example of the feared price-wage spiral. Prices increase, so labor wants a wage increase to keep up with or even stay ahead of inflation. Companies are forced to give in and agree to pay higher wages. But then their labor costs increase, so they have to raise prices even more in order to maintain profitability.
Making matters worse, productivity has turned negative for all of 2022. That drives labor costs even higher, resulting in more upward pressure on prices. The wage-price spiral must be broken before it really gets out of hand and before the inflation rate reaches double-digit levels.
Fortunately, the Federal Reserve has finally put price stability as the primary goal of its current Monetary Policy. While this change in philosophy is about a year and a half late, it is welcomed and should help to avoid the wage-price spiral.
Unfortunately, the Biden Administration continues to deficit spend which creates more excess demand and more inflation. Instead of setting price stability as the primary goal of Fiscal Policy, Biden continues to set the goals of solving real or perceived social injustices and climate change as the primary objectives.
Until inflation is brought under control and reduced to the 2% range, we can expect to see more labor disputes in the future.
