Deflation & Inflation: Labor’s Fate

(revised on 03/06/24)

There is a lot of concern about deflationary pressures in China. Deflation exports itself to importing nations as these nations must then compete against lower priced Chinese goods. Inflation, not deflation, of course, is the current concern in the Western world. Post-COVID supply issues, war spending, economic and energy blockades, have had their inflationary impacts. If, however, deflationary pressures were to overcome inflationary pressures, there would be negative consequences for labor.

Deflation sounds like a good thing: prices come down and that should leave a couple extra bucks in the pocket. Not so, however, among lenders of capital whose business borrowers, due to the decreased revenues associated with deflation, will have a more difficult time repaying debt. Deflation threatens financial stability.

Some workers, while perhaps receiving an initial boost in purchasing power due to lower prices, would eventually find their wages reduced, or worse, lose their jobs as employers look to reduce costs to enable debt repayment.

Consequently, the Federal Reserve (Fed), generally through targeting lower interest rates, would undertake efforts to increase the money supply. These actions would hopefully increase prices through higher levels of investment which would increase employment and wages, putting upward pressure on prices during the investment period. The increases, however, can only go so far.

Employment and wage increases which create inflationary pressures are also unwanted. This creates unstable business and financial conditions. In the face of inflationary pressures, the Fed will undertake measures to reduce the money supply in order to force firms–who would otherwise face higher employment and other input costs–to reduce investment, hiring, and as would follow, wages.

It is interesting to hear labor unions and domestic firms argue for trade barriers, which for environmental purposes–due to less transport–might have merit, but from an employment  and domestic business perspective have less merit. Consequent upward price pressures due to higher domestic labor costs, the objective and consequence of trade barriers, will force the Federal Reserve to decrease the money supply to reduce investment, employment and wages–essentially leaving labor where it previously resided–for many, in a low wage state of being. 

Labor could try to improve its position through grabbing a greater share of capital returns. This, however, also creates problems. If capital is unable to earn returns commensurate with perceived risk, capital investment will not be forthcoming, at least not in the market where labor has gained greater control over capital returns. 

Capital itself is under contractual and regulatory mandates, which, combined with the need for survival, dictates that it seeks maximum returns–with minor exceptions for benevolent behavior,  increasingly necessary to keep an angry public at bay. Without forthcoming investment, due to a greater labor share of capital returns, employment and wages will fall: again labor is forced back into a structurally predetermined wage range.

Maybe the best path for labor to increase its wages would be for labor to take a larger share of the national wage bill. In other words reduce salaries in the upper ends of the corporate hierarchy and use these funds to increase wages in the lower portions of the corporate structure–certainly, a mortal sin within the scrolls of free enterprise. 

This scheme also would  likely have an inflationary impact as lower wage earners, out of necessity, spend a greater portion of their income than their higher income brethren from whom their wage increases would be diverted.  The inflationary impact of greater consumption demand would again force the Fed to tighten the money supply, forcing labor, once again, into its predestined slot in the wage scheme of things.

So there you have it: labor’s fate within the capitalist structure. Labor’s wages are predetermined to fit within a tight range which varies little. While it might be true, as some will argue, that anyone can “make it” within a capitalist economy, not all workers can simultaneously do so, because that would be inflationary.

This type of essay inevitably generates anger towards the rich; it should not. The rich, as a group, are subject to an ideology–capitalism, which applauds and encourages competition and greed, both of which are foundational to the capitalist structure and are deemed as righteous behavior in the broader scheme of things. We cannot peer into the hearts of others, but if we could, we’d likely discover the hearts among the rich are no more or less righteous than our own. Class structure is inherent to the capitalist system; the rich merely play a role within the broader ideological framework.

PostScript:  Comments are welcomed, civility is requested. Please avoid partisan politics.