The ‘misery effect’ is back with a vengeance as US labour strikes take a toll
IT FEELS like the 80s all over again these days, with labour fights, wage-price spirals and misery everywhere.
Predictions for an era of stagflation echoing the late 70s and early 80s have already largely played out. Oil cartels have squeezed western consumers to breaking point.
Oil prices have hovered between US$70 and US$120 a barrel since Russian President Vladimir Putin invaded Ukraine in February 2022 and choked off energy supplies to Europe. Of late, he and his allies in Saudi Arabia have driven oil prices back into the higher end of that range.
It was the oil embargo imposed by the Organization of the Petroleum Exporting Countries (Opec) cartel after the Israeli-Egypt war that sparked the spiral of prices in the 70s. Back then, consumer goods prices skyrocketed because energy costs are key to all manufacturers.
It already feels a bit like that era to some people. Many are talking about the so-called “misery index”, said Eric Marshall, president of the Dallas-based mutual fund, Hodges Capital.
It was the late American economist Arthur Akun who first came up with this index, which adds together the unemployment rate and the inflation rate to capture both the “stag” and the “flation”.
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Until now, economists have taken heart from the fact that one toxic ingredient that made inflation stick for a decade or more during that era is missing this time: wage inflation.
But now, that is changing. A wave of strikes and contract disputes is spreading across the US and elsewhere in many major industrial sectors, bringing back painful memories of what happened 30 to 40 years ago.
In 1981, US president Ronald Reagan fired more than 11,000 air traffic controllers who had ignored his order to return to work.
Over in Britain, the coal-mining industry ground to a halt in the mid 80s as miners who sought higher wages put pressure on then-prime minister Margaret Thatcher and her government.
This Friday (Sep 15), roughly 146,000 General Motors (GM) employees will go on strike in the US unless the carmaker’s management can close the gap between their offer of a 3 per cent increase and the United Auto Workers (UAW) union’s demand for a mid-30 per cent pay hike (pared back from an original demand of 46 per cent).
It would be the largest walkout in Detroit since a GM general strike in 1970, and one of the largest in any industry since an AT&T strike in 1983.
Already, thousands of Hollywood actors and writers are on strike with the Writers Guild of America, the Screen Actors Guild and the American Federation of Television and Radio Artists.
“It’s the misery effect,” said Marshall of Hodges Capital. “You have inflation eroding away people’s purchasing power. It’s only natural (that) it results in strikes.”
There are only two possible outcomes of these disputes. The first is a prolonged strike, which could cause shortages of cars and higher prices for imported cars.
The other outcome would be a bout of wage inflation. If wages are raised, there is a chance of a spiral effect, and this is what made inflation so pernicious in the 80s. Marshall questioned whether the Big Three carmakers in Detroit – Ford, GM and Stellantis – are equipped for a prolonged labour fight.
Even if the UAW calls more “targeted” strikes – and The Wall Street Journal recently reported that the union likely will – it will affect the price of automobiles, a key inflation component.
“We expect normalising auto production, higher inventories and higher new-vehicle incentives to lead to further declines in used car inflation, although potential auto strikes pose some near-term upside risk to our forecast,” said analysts at brokerage Goldman Sachs.
In other words, either strikes or a settlement of the dispute could lead to inflation, and that would lead to more rate increases, and even more misery.
“If a strike were to occur, that could certainly influence (the US Federal Reserve’s) decisions,” said J D Joyce, president of Houston financial advisory Joyce Wealth Management. “If it drives inflation higher, maybe they are going to have to hike more than what people are anticipating.”
Observers say the disputes at GM will soon be echoed at other big carmakers, and in other major industries.
Unions for workers in the Las Vegas Strip – a stretch known for its concentration of resort hotels and casinos – will hold a city-wide vote later this month, which could lead to more than 50,000 housekeepers, bartenders and other service staff going on strike.
Some employers have chosen to settle, and that could force their competitors to match the wage increases. Recently, United Airlines pilots secured a new contract under which their salaries would be raised 40 per cent over four years.
Elsewhere, United Parcel Service workers recently won pay increases of more than 10 per cent. The New York Times raised its workers’ wages by 12.5 per cent after a one-day walkout. Other media workers are seeking similar pay increases. Organised labour has more leverage in negotiations because of a shortage of skilled workers as baby boomers retire, said Marshall.
According to the latest available data, at least a million American workers went on strike every year from 1968 through 1983. A comparable number might walk out on the job this year, the first time since that era.
Given the scale of the strikes and the heavy demands of the workers this year, employers and the unions should brace themselves for a long battle ahead, with neither side willing to back down that easily.
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