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Profit-driven inflation—the policy implications

We need to strengthen labour to fight inflation

Ronald Janssen argues that instead of trying to weaken labor in the face of inflation, it is time to strengthen it in an article recently published by Social Europe. He highlights that wages have lost their purchasing power due to inflation, rather than driving inflation itself.

The Organization for Economic Co-operation and Development (OECD) has provided evidence that profit shares in GDP have increased in most countries, indicating that businesses have been raising sales prices to boost profits.

Ronald suggests that there is room for non-inflationary nominal wage growth and that high profits can buffer against inflationary pressure from wage increases. He challenges the narrative that high inflation is solely due to excess aggregate demand caused by wage push, pointing out that profit shares are rising while labor shares are falling.

Ronald argues that recent supply-side disruptions and bottlenecks have led to temporary monopoly power for businesses, allowing them to raise prices beyond higher input costs. As the pricing power of businesses decreases, they will need to reduce profit margins and stronger wage growth becomes necessary to restore fairness and transfer purchasing power back to workers.

Ronald criticizes the current policy focus on preventing substantial wage growth and calls for policy reforms that support stronger collective bargaining and a redistribution from profits to wages. It suggests promoting social dialogue and tripartite concertation among trade unions, employers, and governments to address the cost-of-living crisis and restore purchasing power while remaining vigilant against self-sustaining inflation.

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