Why companies are obsessing over worker pay

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Why companies are obsessing over worker pay
They're all keeping a close eye on rising wages, which could hold the key to where inflation heads next.

This just in: Compensation for American workers climbed 4% in the year to December 2021, the biggest increase in two decades.

Companies have emphasized as they've reported financial results that they don't see this trend dissipating any time soon.

"As [we] go into this year, we are expecting that there is going to continue to be pressure on wages," McDonald's (MCD) CEO Chris Kempczinski said on a call with analysts.

Southwest Airlines (LUV) highlighted plans to hike starting wages "to be competitive in the market" as it looks to hire 8,000 more employees this year. J.B. Hunt (JBHT), the trucking company, noted that due to a "very difficult" labor market, exacerbated by the extent to which drivers are exposed to Covid-19, "cost per hire is up," as are sign-on bonuses.

"The price of labor's going up, we're going to have to deal with it," JPMorgan Chase (JPM) CEO Jamie Dimon, who leads America's largest bank, said in an interview with Fox Business earlier this month.

Why it matters: Rising wages may boost costs for businesses, but they're a positive development for workers, at least in theory. Higher wages could help reduce turnover and burnout in industries like trucking.

The full picture is more complicated, however. When adjusted for inflation, wages and salaries in the United States fell by 1.9% for the 12 months ending in December — meaning that higher prices are canceling out pay gains.

Still, wage increases are an important component of the inflation story. Today's economy looks very different from that of the 1970s and 1980s, the last time inflation was a major problem. But economists are still on high alert for signs of a "wage-price spiral."

That's a damaging feedback loop in which businesses raise prices, and workers then demand higher wages to cover their bills. Should that pattern keep repeating, inflation could stick around even after supply chain blocks and other coronavirus-related factors ease.

"Labor market developments are critically important because if the psychology of higher inflation is to take root it will do so through wages and pay settlements," Neil Shearing, group chief economist at Capital Economists, said in a research note published Monday.

While stock market turmoil "has understandably grabbed the headlines in recent weeks ... it's developments in labor markets that will ultimately determine the future path of inflation and interest rates," he continued.