Looking At The Wrong Wages

Paul Krugman is adamant that there is no inflation risk in the US Economy. One of his recurring arguments is that labor costs are not rising and therefore a wage-price inflation spiral is impossible. From his recent The Inflation Monster post highlighting Average Hourly Earnings of All Employees:

First, do you see any sign that workers are about to (or are even able to) demand higher wages to compensate for the higher prices of gas and food?
Second, do you any sign that employers are getting ready to make more generous wage offers?

These rhetorical questions Krugman, of course, answers as "No" and therefore inflation is not going to happen.


Now, I'm no Nobel Prize winner, but it seems to me that we are looking at the wrong wages. The chart above captures US employees. But how many goods are being produced by US employees anymore? Sure, US workers are facing 9% unemployment and can't demand higher wages but they aren't making anything Americans buy.

So what's happening in the places where our goods are created?
China announced a 21% wage increase in December to go into effect starting this month. Even before that increase, SFGate reports:

The pay of the migrant laborers who fuel China's export industry rose by 40 percent in 2010, according to Credit Suisse's Tao. It will continue climbing 20 percent to 30 percent in each of the next three years as Chinese leaders pump up domestic demand.

And looking further out, we can expect our manufacturing base to have wage increases of 84% over five years.


So to answer Krugman's questions considering the full working population of  Chimerica the answer becomes a resounding "YES!" 


To me, the implication is that as wages rise in the "Chi" half but stagnant in the "merica" half of Chimerica, we will be increasingly paying more for Chinese made goods AND have more demand for those goods by the emerging Chinese middle-class themselves. So from a supply side and the demand side we will have pressures driving up the cost of our goods while US wages stagnate. 


The result will be, at best, '70s style stagflation.