Inflation and distribution during the post-COVID recovery

Setterfield, Mark Working Paper Inflation and distribution during the post-COVID recovery FMM Working Paper, No. 82 Provided in Cooperation with: Macroeconomic Policy Institute (IMK) at the Hans Boeckler Foundation Suggested Citation: Setterfield, Mark (2022) : Inflation and distribution during the post-COVID recovery, FMM Working Paper, No. 82, Hans-Böckler-Stiftung, Macroeconomic Policy Institute (IMK), Forum for Macroeconomics and Macroeconomic Policies (FMM), Düsseldorf This Version is available at: https://hdl.handle.net/10419/274244 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/legalcode FMM WORKING PAPER No. 82 • October 2022 • Hans-Böckler-Stiftung INFLATION AND DISTRIBUTION DURING THE POST -COVID RECOVERY: A KALECKIAN APPROACH Mark Setterfield 1 ABSTRACT The early stages of recovery from the recession induced by the COVID-19 pandemic have been accompanied by a marked increase in inflation in the US and elsewhere. Much has been made of this outcomes, and the economic distress associated with it, in popular discussion of the economy. This paper provides a Kaleckian conflicting-claims analysis of inflation during the post-COVID recovery, that distinguishes between rising wages, pandemic-related supply shocks, and corporate price-setting behaviour as sources of inflationary pressure. A key conclusion that arises from the co-determination of inflation and distributional outcomes in the Kaleckian framework is that distributional developments that have further disadvantaged working households, rather than inflation per se, are the chief source of recent economic distress – and should be the chief cause for concern among policy makers. ————————— 1 Professor of Economics, The New School for Social Research, New York, NY, USA; FMM fellow. Email [email protected]. Inflation and distribution during the post-COVID recovery: a Kaleckian approach Mark Setterfield∗ October 17, 2022 Abstract The early stages of recovery from the recession induced by the COVID-19 pandemic have been accompanied by a marked increase in inflation in the US and elsewhere. Much has been made of this outcomes, and the economic distress associated with it, in popular discussion of the economy. This paper provides a Kaleckian conflicting-claims analysis of inflation during the post-COVID recovery, that distinguishes between rising wages, pandemic-related supply shocks, and corporate price-setting behaviour as sources of inflationary pressure. A key conclusion that arises from the co-determination of inflation and distributional outcomes in the Kaleckian framework is that distributional developments that have further disadvantaged working households, rather than inflation per se, are the chief source of recent economic distress – and should be the chief cause for concern among policy makers. JEL codes: E02, E11, E12, E25, E31, E64 Keywords: Inflation, COVID-19, conflicting claims, wage share, income distribution 1. Introduction During the third quarter of 2022, inflation in the US economy – having exceeded 5% and risen steadily since the middle of the previous calendar year – reached a 40-year high of approximately 9%. These events have captured media attention and met with widespread public disapprobation as a result of their implications for the cost of living. ∗New School for Social Research; email [email protected]. An earlier version of this paper was presented at the workshop Heterodox Perspectives on the Current Inflation Surge, Campus Condorcet, Paris, September 15th, 2022. I would like to thank workshop participants, and in particular Antonella Palumbo and Carlos Pinkusfeld, for their helpful comments. Any remaining errors are my own. 1 Having previously identified the rise in inflation as a temporary phenomenon associated with supply shocks in the aftermath of the COVID-19 pandemic, the Federal Reserve changed course during the first half of 2022. In keeping with orthodox wisdom, it set about a singleminded pursuit of lowering the rate of inflation by raising interest rates in order to suppress demand and so arrest (or even reverse) the rapid fall in unemployment witnessed to that date. The ambition of this policy intervention was to reduce pressure on wages, wage inflation being (purportedly) the source of higher price inflation. The position taken in this paper is that the policy response outlined above risks further disadvantaging working households who, having previously lost out to four decades of real wage stagnation, lost out again to adverse redistributive outcomes associated with inflation during the first two years of the post-COVID recovery. In order to advance this argument, a Kaleckian conflicting-claims inflation model is developed that has two important properties. First, it facilitates distinction between three sources of inflationary pressure, arising from wage-push in the labour market, pandemic-related supply shocks, and corporate pricesetting behaviour. Second, it models the co-determination of inflation and distributional outcomes. As will become clear, the latter are critical to understanding the socio-economic costs associated with the post-COVID inflationary episode. The remainder of the paper is organized as follows. Section 2 reviews some stylized facts, putting events during the first two years of the post-COVID recovery into the broader context of developments in wage and price dynamics over the last 3-4 decades. Section 3 then develops a Kaleckian conflicting-claims inflation model (following Rowthorn, 1977) and uses this model to explain inflation, real economic performance, and developments in the wage share during the neoliberal era (1990-2019). In section 4, the same model is used to explain inflation, real performance, and wage share outcomes during the post-COVID recovery. Emphasis in this section is on three developments: tightening of the labour market; supply shocks; and increasing mark ups caused by increased corporate concentration and a 2 facilitated by a ‘permissive’ price-setting environment. Section 5 concludes, emphasizing that distributional outcomes (rather than inflation per se) were the source of household economic distress during the first two years of the post-COVID recovery, and ought to be the focus of policy intervention. 2. Some stylized facts According to popular wisdom, inflation increased after the second quarter of 2021 because the pace of recovery from the COVID-induced recession of early 2020 caused the labour market to tighten so quickly and to such an extent that the US economy encountered labour shortages. These labour market conditions put upward pressure on wage costs and hence prices and, in turn, create the risk of a self-perpetuating wage-price inflationary spiral. But the evidence of business cycle expansions in the US since 1990 suggests that if this account is true, then it is truly extraordinary. Table 1 presents the average annual rates of growth of real wages in the US economy over successive business cycle upswings since 1949. As can be seen, the average rates of growth of real wages during cyclical booms falls from 2.9% during the Golden Age (1949-73) to 1.2% during the 1975-1990 inter regnum, and then falls again to just 1.1% during the neoliberal era (1990-2019). Moreover, the rate of growth of real wages falls during each of the three consecutive cyclical booms since the beginning of the neoliberal era in 1990. The inability of workers to bid up real wages, even during cyclical booms, has been worsening over time. Of course, real wage growth is linked to productivity growth and, with the exception of a brief period around the turn of the millennium, US productivity growth is known to have declined since the end of the Golden Age. However, the diminishing growth of real wages during US cyclical booms is not simply a result of slower aggregate productivity growth.1 1The slowdown in real wage growth is, in part, a result of productivity growth dynamics, especially as a result of structural change involving deindustrialization and the rise of the service sector. Not only does 3 Table 1: Average Annual Rates of Growth of the Real Wage in the US over Successive Cyclical Upswings, 1949-2019 Average Rate of Growth of Real Wages 1949II – 1953II 3.3 1954III – 1957III 3.6 1958III – 1960II 2.7 1961II – 1969IV 2.4 1971I – 1973IV 2.1 1975II – 1980I 1.2 1983I – 1990II 0.9 1991II – 2001I 1.6 2002I – 2007IV 1.0 2009III – 2019IV 0.8 Golden Age (1949-73) 2.9 Inter Regnum (1975-90) 1.2 Neoliberal Era (1991-2019) 1.1 Source: Author’s calculations based on Federal Reserve Economic Data (FRED) and NBER business cycle dating. 4 This is clear from figure 1, which plots the wage share against the employment rate in the US economy 1991-2019. From 1991-2001 a typical ‘Goodwin pattern’ is observed, as the wage share falls then rises as the boom progresses, so that the real wage keeps up with productivity growth (leaving the wage share unchanged) over the course of the cycle.2But this pattern is not evident thereafter: from 2002-2007, the wage share falls until the very last year of the expansion and only then begins to rise; and from 2009-2019 we observe another net decline in the wage share over the course of the cyclical boom, the wage share remaining essentially constant 2010-2019 even as the unemployment rate dropped by over 6 percentage points to levels last seen in the early 1970s. The essential lesson from all this is that since 1990, workers have barely succeeded in bidding up real wages – even as the labour market has, at times, ostensibly tightened towards record-low rates of unemployment. Moreover, real wage increases have consistently failed to match productivity growth (at whatever rate), resulting in a secular decline in the wage share of income. But what of the post-COVID recovery? Have workers suddenly found the means to bid up nominal wages to such an extent that they threaten profitability unless ‘excessive’ wage increases are ‘passed through’ in the form of higher prices – thus generating inflation? Several of the extraordinary features of the post-COVID recovery discussed by Setterfield (2022) may well have contributed to labour market tightness as the recovery gathered pace, despite the historic depth of the pandemic-induced recession in spring 2020. For example, absent any equivalent of the German Kurzarbeit work sharing system (which responds to recessions by deindustrialization contribute to deunionization (a theme that will be taken up below), it also has a direct effect on real wage growth. Hence the low productivity/(near) zero productivity growth that characterizes so-called ‘stagnant’ service sector industries (Baumol et al., 1989) means that not only are these industries labour-attracting (employment in stagnant services grows rapidly as output in these industries grows because of their lack of productivity growth), they are also low wage/(near) zero wage growth industries, by virtue of their low productivity/(near) zero productivity growth. On the direct contribution of deindustrialization to recent patterns in real wage growth, see Mendieta-Mu˜noz et al. (2021). 2Recall that v=ω qwhere vis the wage share of income, ωis the real wage, and qdenotes output per worker. Hence constancy of vrequires ˆω= ˆq. 5 Figure 1: The wage share – employment relationship in the US, 1991-2019 (Source: Bureau of Labor Statistics (BLS)) TITLE: Why can’t workers bid up wages? Institutions and slack in the US labour market AUTHOR: Mark Setterfield, New School For Social Research Abstract It is well known that wage stagnation affecting the majority of working households has been an important contributory factor to burgeoning income inequality in the US over the past 40 years. This paper shows how labour market institutions, labour market slack, and their interaction (which has created ‘institutionalized slack’) impair the ability of workers to bid up wages even during short-term cyclical booms. The consequences for wage and price dynamics are investigated – one important consequence being the ‘flat Phillips curve’ phenomenon. 90.0 91.0 92.0 93.0 94.0 95.0 96.0 97.0 54.0 56.0 58.0 60.0 62.0 64.0 Employment rate US Wage share US 1991 2001 2002 2007 2009 2019 reducing hours worked and compensating employees for loss of income due to short hours), the US economy responded to the onset of pandemic lock-downs by means of ad hoc reliance on extensions to the unemployment insurance system. These were designed to compensate workers for total loss of income due to the sudden onset of mass unemployment. In other words, labour in the US economy was underutilized during the COVID-19 recession in a manner that maximized worker-firm separations and thus hampered quantity adjustments during the recovery, as firms who laid off workers en masse subsequently struggled to rehire.3Concerns also arose during the recession of a possible hysteresis effect on labour force participation, owing to lingering health care concerns, re-evaluations of work/life balance, and/or the realization (resulting from the ‘natural experiment’ forced upon many working families by a combination of involuntary unemployment and reorganization of the provision 3See also Giupponi et al. (2022) on the effectiveness of short-time work as a response to large and transitory shocks. 6 of child care and schooling) that combining low-wage work and costly child care makes less financial sense than reverting to more traditional household structures that involve unpaid provision of care-giving. Meanwhile, other workers forced through the same natural experiment may have brought forward decisions to retire that would otherwise have been more evenly dispersed over a period of years. According to Forsythe et al. (2022), few of these developments appear to be having enduring effects on the US labour market, however (with the exception of retirement ‘bunching’). And the extent of labour market tightening during the post-COVID recovery is otherwise debatable. ‘Headline’ unemployment (U3) fell rapidly following the onset of recovery, and the unemployment-vacancy (UV) ratio fell below 1.0 as early as July 2021.4But U3 does a notoriously poor job of capturing slack in the US labour market, because of the prevalence of involuntary part-time work and discouragement (Setterfield, 2021; Blanchflower et al., 2022).5That said, both U3 and U6 – the measure of US unemployment that accounts for involuntary part-time work and discouragement – suggest the relative (if not absolute) tightness of the US labour market after two years of the post-COVID recovery. This is illustrated in figure 2, which plots the values of U3, U6 and the difference between U6 and U3 during the first two years of the three most recent business cycle expansions in the US economy.6As can be seen from figure 2, in the course of the early stages of the post-COVID recovery, U6 (as well as U3) fell rapidly as, indeed, did the gap between U6 and U3. These developments are unprecedented in the course of recoveries during the neoliberal era, being observable 4https://www.bls.gov/charts/job-openings-and-labor-turnover/unemp-per-job-opening.htm. For purposes of comparison, in the preceding recovery from the Great Recession, the UV ratio did not fall below 1.0 until February 2018, almost 9 years into the expansion. 5There is certainly anecdotal evidence of this problem during the post-COVID recovery. For example, some part-time workers report that they are working fewer hours than they desire even as their employers claim to be struggling in the face of a labour shortage (“Despite Labor Shortages, Workers See Few Gains in Economic Security,” The New York Times, February 3, 2022). 6Data from the recovery that began during the second quarter of 1991 is not available because BLS measurement of the U6 data reported in figure 2 did not begin until January 1994. See Bregger and Haugen (1995) on the recent history of ‘broad’ BLS measures of unemployment. 7 Comparative statics associated with this steady state solution are useful for contrasting the post-1990 neoliberal era with previous macroeconomic outcomes in the US economy (see also Setterfield, 2006, 2007; Setterfield and Blecker, 2022). First, note that if we assume that worker bargaining power in the labour market and hence µvaries directly with the rate of employment,13 the model produces a conventional (i.e., downward-sloping) longrun Phillips curve in unemployment-inflation space – referred to hereafter as the standard Phillips curve (SPC). This is illustrated in figure 3, where an increase in unemployment from U1to U2reduces worker bargaining power and hence µ(from µ1to µ2), which causes the wage-bargaining curve to rotate from W B to W B0, lowering inflation from ˆp1to ˆp2. These developments trace out, in the movement from A0to B0, the SPC depicted in the north-west quadrant of the figure. The same series of events simultaneously lowers the wage share from v1to v2, thus tracing out (in the movement from Ato B) the wage-share Phillips curve (WSPC) in the south-east quadrant. Neoliberalism has been based on an ‘incomes policy based on fear’ (Cornwall, 1990) associated with a structural reduction in worker bargaining power at any given rate of unemployment. The constituent elements of this incomes policy based on fear include institutional change, such as changes to labour law that make it harder for workers to form trade unions, that have contributed to a marked decline in unionization rates. They also include forms of ‘institutionalized labour market slack’ resulting from changes in employment-relationship norms that create an increased threat of job loss (and hence a ‘synthetically’ slacker labour market) for any given (measured) rate of unemployment. Examples of institutionalized slack include: involuntary part-time and contingent employment, which has created a new form of under-employment resulting from changes to what constitutes ‘a job’ associated with movement away from the norm of full-time, year-round employment; downsizing exercises, 13Note that, for the sake of simplicity, vWis treated as exogenously given. See, however, Setterfield and Lovejoy (2006) for discussion of the endogeneity of workers’ aspirations. 14 45o v U U ˆˆ ,wp U 2 U 2 U 1 U 1 v 1 v 2 v F v W v W μ 1 v W μ 2 1 ˆ p 2 ˆ p WSPC SPC A A' B B' PS WB WB' Figure 3: Conflict inflation and the Phillips curve 15 which create the omnipresent threat of job loss even in the absence of downturns in trade so that regardless of the unemployment rate, the ‘threat of the sack’ hovers over workers thus making for (effective) slack even in a (notionally) tight labour market; and the threat of plant relocation, which effectively imports the unemployment of other regions and in so doing, once again maintains the ‘threat of the sack’ and hence (effective) labour market slack even in a (notionally) tight labour market.14 The workings of the incomes policy based on fear are illustrated in figure 4, where once again worker bargaining power falls, resulting in a decline in µ(from µ1to µ2), rotation of the wage-bargaining curve from W B to W B0, and so a reduction in inflation (from ˆp1to ˆp2) and the wage share (from v1to v2). This time, however, the initiating change comes from the creation and consolidation of the incomes policy based on fear rather an increase in unemployment. As a result, the SPC and WSPC shift (from SP C1and WSPC1to SP C2and W SPC2, respectively) and the economy moves from points A0and Ato points B0 and B, realizing lower inflation and a lower wage share without any increase in unemployment. Recently, even neoclassical orthodoxy has (belatedly) acknowledged the importance of declining worker power as source of the low inflation and increased inequality characteristic of the neoliberal era (Stansbury and Summers, 2020; Card, 2022; Yeh et al., 2022; Azar et al., 2022).15 At least some of this neoclassical literature adopts substantively different (marginalist) value-theoretic and price-theoretic foundations from those that advise the conflicting-claims inflation model developed in this paper, but the results derived are similar in substance to the analysis summarized in figure 4: the increased power of firms vis a vis workers in the wage bargain is essential for understanding macroeconomic outcomes over the 14In the limit, institutionalized slack spells the ‘end’ of auction market conditions in the labour market, if employers are able to insist on trade at their offer price by successfully exploiting political mechanisms (such as increases in the number of H1B visas or ending extensions to unemployment benefits) to adjust labour supply, instead of their excess demand bidding up wages and so adjusting the quantity of labour supplied (Setterfield, 2021, p.13). 15Ratner and Sim (2022) go so far to as to claim to have developed a ‘Kaleckian’ Phillips curve based on their observation of the declining bargaining power of trade unions. 16 45o v U U ˆˆ ,wp U 1 U 1 v 1 v 2 v F v W v w μ 1 v w μ 2 1 ˆ p 2 ˆ p WSPC 1 WSPC 2 SPC 1 SPC 2 A B A' B' PS WB WB' Figure 4: The neoliberal incomes policy based on fear past four decades. 4. Explaining inflation and distribution during the postCOVID recovery As intimated in section 2, the longer-term events just reviewed provide an important context for interpreting the contemporary functioning of the US economy. But our immediate interest is in the short term – specifically, events that have unfolded during the first 2 years of official recovery from the brief but deep recession, in spring 2020, associated with the onset of the COVID-19 pandemic. Consistent with the stylized facts as presented in table 2, inflation 17 during the post-COVID recovery can be interpreted in terms of the Kaleckian conflictingclaims model developed in the previous section, and understood as emanating from three distinct sources. First, rapid recovery from the pandemic-induced recession gave rise to tightening of the labour market that was exceptional (for the phase of the business cycle) by recent comparative standards. These conditions, coupled with ‘spontaneous collective action’ in the form of the ‘great resignation’ (Setterfield, 2022, pp.13), increased worker bargaining power and so put upward pressure on nominal wage growth and the wage share of income. This is most clearly evident during the first phase (May 2020 – March 2021) of the recovery, as described in the third row of table 2.16 Although there is no evidence in the third row of table 2 of these events having an immediate impact on inflation, it is reasonable to suppose that the increased growth in wage costs has contributed to elevated inflation during the post-COVID recovery period as a whole. This sequence of events – emanating from demand pressure in the labour market – is illustrated in figure 5, where reduction in the rate of unemployment from U1to U2is associated with an increase in worker bargaining power that elevates µfrom µ1to µ2, increasing the steady-state rate of inflation and wage share from ˆp1and v1to ˆp2and v2, respectively. These events are summarized by movement along the standard Phillips curve SPC2from B0to C0, and simultaneous movement along the wage-share Phillips curve W SPC2from point Bto C. A critical feature of the analysis to this point, which focuses on events in the labour market causing the onset of higher inflation, is that other things remained equal. But this would not be an appropriate characterization of the post-COVID recovery, during which, other factors have emerged that have affected – indeed, come to dominate – the determination 16Recall that inflationary wage pressure is less evident during the second phase of the post-COVID recovery, from April 2021 – May 2022. As noted by Setterfield (2022, p.13), this is a reminder of the continued structural weakness of labour in the US economy, and concomitant absence of conditions conducive to the emergence of a robust and self-perpetuating wage-price inflationary spiral. 18 45o v U U ˆˆ ,wp U 1 U 1 U 2 U 2 v 2 v 1 v F v W v W μ 2 v W μ 1 2 ˆ p 1 ˆ p WSPC 2 SPC 2 C B' B C' PS WB' WB Figure 5: Labour market pressure and inflation during the early stages of the post-COVID recovery 19 of inflation. Hence a second source of inflationary pressure has arisen from recurrent supply shocks, associated with: global supply chain problems (repeated pandemic-related lock downs in China, bottlenecks at major ports such as Long Beach, CA, and local interruptions to production and distribution caused by COVID-related illness among an inadequately vaccinated domestic population); and spikes in global food and energy prices caused by the Russian invasion of Ukraine and the response of the international community to this invasion (Storm 2022, pp.14-20; Nersisyan and Wray 2022, pp.30-32). In terms of the model developed in the previous section, any such supply shock will result in η > 0 following which we will observe ε > 0 for some discrete period. In this situation, we have ˆw= ˆpF⇒v=v∗, but this last outcome is only a ‘conditional’ or ‘provisional’ equilibrium,17 because: ˆpF<ˆp= ˆpF+ε and hence: ˙v=v ω˙ω=v( ˆw−ˆp) = −vε < 0 In other words, distributional outcomes captured at any given point in time now represent only a ‘snapshot’ of an ongoing redistributional process, as a result of which the wage share will continue to atrophy as long as the supply shock persists (ε > 0).18 The provisional equilibrium outcome so-described – together with its attendant elevation of the rate of inflation (ˆp > ˆpF) – is illustrated in figure 6, where in keeping with the notion of provisional equilibrium, v2now represents a transitional value.19 Meanwhile, the rate of inflation ‘inher17Following Setterfield (1997, p.84), a provisional or conditional equilibrium refers to a “state of rest brought about by [...] temporary suspension of [some of the] forces of change endogenous to a system ... [and that] await[s] subsequent redefinition by forces endogenous to the sequential progression of the economy through historical time”. See also Chick and Caserta (1997, p.225) and, for more recent discussion of this concept in macrodynamics, Gallo and Setterfield (2022). 18The reader is referred to appendix A for analysis of steady state outcomes following the dissipation of the once over (but persistent) shock described here. 19The reader is again referred to appendix A for fuller analysis of the transition that vis undergoing and its associated steady-state outcome. 20 45o v U U ˆˆ ,wp U 1 U 1 U 2 U 2 v 2 v 1 v F v W v W μ 2 v W μ 1 2 ˆ p 1 ˆ p WSPC 2 SPC 2 C B' B C' PS WB' WB D' 22 ˆˆ t t pp ε = + SPCt 2 Figure 6: Post-COVID inflation: the contribution of supply shocks ited’ from the process described in figure 5 (ˆp2) is now augmented by the value of εat any point in time, resulting in a higher rate of inflation at this same point in time (ˆpt 2= ˆp2+εt) associated with the unchanged rate of unemployment U2. These developments are captured by movement from point C0to point D0as the SPC shifts from SPC2to SP Ct 2. Finally, a third source of inflationary pressure has been corporate price-setting behaviour in the wake of the cost-based inflation arising from the first two sources (see also Nersisyan and Wray, 2022, pp.25-30). Reference has already been made to the distinction between Hicksian fix and flex price markets that underlies the structure of the Kaleckian model developed in section 3. In order to properly develop and understand corporate price-setting behaviour as a third source of inflationary pressure during the post-COVID recovery, we need 21 to more thoroughly explore the theory of administered pricing that the model associates with intended inflation resulting from Hicksian fix price markets.20 Since the introduction of the ‘full-cost rule’ by Hall and Hitch (1939), the establishment by firms of a suitable mark up over average costs (however defined) has been associated with ‘fairness’ (as perceived by customers) and industrial concentration (or what Kalecki referred to as the ‘degree of monopoly’).21 Consistent with these price-theoretic foundations, the argument here is that in the course of the post-COVID recovery, firms have encountered a ‘permissive’ pricing environment in which they have been able to exploit increased corporate concentration by increasing mark ups, and so inflate prices independently of the pass-through effects associated with rising costs. There are three elements to this argument. First, and as is well known, corporate concentration in the US economy has increased in recent decades (Baker, 2019; Philippon, 2019; Eeckhout, 2021). Second, this increased concentration has affected both pass-through (of cost increases into price increases) and markup-setting behaviour during the post-COVID recovery. As regards the former, Br¨auning et al. (2022) show that pass-through rises with concentration, the increase in concentration since the turn of the millennium having created a 25 percentage point increase in the size of this pass-through effect. With regard to the latter, recall the findings of Konczal and Lusiani (2022) discussed in the previous section, which document a sudden and large increase in markups during 2021 among firms in the 20As noted by Robinson (1979, p.41), inflation being (by definition) the steady growth of the general price level, any theory of inflation should be properly rooted in a theory of prices. 21See Lavoie (2014, chpt. 3) for further discussion. Kalecki extended concern with fairness considerations to the labour market given the connection between the mark up and the wage share of income – which extension is foundational to the conflicting-claims model of inflation that is central to this paper. With respect to the continued prevalence of fairness considerations in the goods market, it is worth noting the recent advice to small businesses in The Guardian newspaper (‘US inflation isn’t going away. Small businesses must plan ahead,’ The Guardian, Sunday August 14th, 2022 (www.theguardian.com/business/2022/aug/14/us-inflation-prices-small-business): “So what to do if you’re a small business? ... You raise prices discriminately and carefully. You communicate frequently with your customers ...” This is consistent with the notion of the consumer as a ‘participant’ in pricing decisions due to the importance of fairness in pricing behaviour and hence (by extension) price dynamics. 22 upper tail of the markup distribution – which the authors interpret as evidence of a role for corporate product market power as a key driver of the surge in inflation after April 2021. Supportive of this interpretation is the finding of Bivens (2022), that increases in profit margins accounted for 53.9% of the increase in prices since the second quarter of 2020, as opposed to just 11.4% of the increase during the period 1979-2019.22 But given that concentration has been increasing in the US for several decades, why has it only become a source of increased inflationary pressure during the post-COVID recovery? This brings us to the third and final element of the argument developed here: the ‘permissive’ pricing environment created by the first two sources of inflationary pressure (emanating from the labour market and supply shocks) outlined earlier. In keeping with the theory of administered pricing, these have relaxed the ‘fairness constraint’ on corporate pricing behaviour, by creating sources of cost-based price increases that provide ‘camouflage’ for firms, allowing them to increase markups (and hence prices) under the guise that they are ‘merely’ passing through cost increases – which behaviour in and of itself (as originally noted by Hall and Hitch, 1939) is considered ‘fair’ by customers. In other words, many US corporations have long had sufficient monopoly power to raise markups, but their ability to act on this monopoly power has been constrained by fairness considerations – until this constraint was relaxed in the permissive pricing environment of the post-COVID recovery. Once cost increases emanating from the labour market and/or supply shocks put upward pressure on prices, the path became clear for further price increases (via markup growth) without the latter appearing to violate fairness considerations in price setting behaviour: to all outward appearances, firms were doing no more than passing through cost increases. At this point, then, the previously latent effect of increased corporate monopoly power on 22Bivens (2022) also shows that unit labour costs have contributed less than 8% to the rise in prices since 2020 QII, as compared to 61.8% during the period 1979-2019. This provides insight into the relative importance of two of the three sources of inflationary pressure identified in the account of inflation during the post-COVID recovery in this paper. 23 45o v v U ˆˆ ,wp v 1 U 1 v 2 U 2 v 2 v 1 v F v W v W μ 2 v W μ 1 2 ˆ p 1 ˆ p WSPC 2 SPC 2 C B' B C' PS WB' WB v 3 WSPC 3 D Figure 8: Post-shock steady state outcomes 30 References Azar, J. 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The subjective inflation expectations of households and firms: Measurement, determinants, and implications. Journal of Economic Perspectives 36(3), 157–84. Yeh, C., C. Macaluso, and B. Hershbein (2022). Monopsony in the us labor market. American Economic Review 112 (7), 2099–2138. 33 Imprint Publisher Macroeconomic Policy Institute (IMK) of Hans-Böckler-Foundation, Georg-Glock-Str. 18, 40474 Düsseldorf, Contact: [email protected], https://www.fmm-macro.net FMM Working Paper is an irregular online publication series available at: https://www.boeckler.de/de/fmm-working-paper-22457.htm The views expressed in this paper do not necessarily reflect those of the IMK or the Hans-Böckler-Foundation. ISSN 2512-8655 This publication is licensed under the Creative commons license: Attribution 4.0 International (CC BY). 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