ahhaha and Investor2,
RE: <<Higher labor costs increase the final cost of the good or service being sold. A company must increase the price of the good or service to cover the higher cost. Increased prices = inflation.>>
and ahhaha's response:
<<A company must increase the price to cover costs, but they can't because the competition won't let them. Therefore, a rise in hourly earnings won't cause inflation, rather it will squeeze margins. That isn't enough to cause inflation per se.>>
Actually there is another alternative: the company can lower their costs enough to adjust to their increased labor costs. This can be done either through this like investments in new equipment to make their employees more productive (or to use fewer employees to make the same number of widets or perform the same service), they can carry their inventory more efficiently, and so don't need as many warehouses or to tie up their capital in goods to be sold, they can figure out that their customers don't need the same level of service that they had been giving, ....
In short, they can do all sorts of things to both maintain their margins ( or sometimes even expand them) and still pay their employees more money. The list above is just a very, very minimal list. And when they can't raise prices, all of the sudden people become very clever in figuring out new ways of doing things that do just that.
Increased labor costs alone never "cause" inflation. There has to be enough money sloshing around in the economy, and there has to be the right psychology where people will accept the raised prices, not to mention some capacity constraints so that other companies won't just jump in. The first condition may well be there, but the latter two certainly aren't. Not for most things, anyway. |
