With Joe Biden on the picket line this week in Michigan—an unprecedented action for a US president—my memory bank lit up. I immediately thought of an historic GM-UAW settlement in September 1979 that was a critical milestone in the Great Inflation. Back then, the autoworkers cut a deal that provided for roughly a 30% increase in compensation over a three-year contract, well above 6.6% average CPI-based inflation rate of the prior three years (1976-78). At the time, many believed that settlement was decisive in unleashing a lethal wage-price spiral that quickly pushed CPI inflation to a post-World War II record of 13.5% in 1980.
That was certainly the view at the Federal Reserve Board where I was working at the time. The research staff was obsessed over the perils of cost-push inflation. Our favorite piece of evidence to support this argument was the seemingly tight linkage between underlying inflation and increases in unit labor costs (changes in worker compensation less productivity growth) . It was hardly a sophisticated calculation, but it drew heavily a new measure of “core inflation” that had been created by the Fed’s staff by stripping out volatile food and energy prices from the headline CPI. We extrapolated the GM settlement to Ford and Chrysler, made allowances for further pressures from cost-of-living indexation and sagging productivity, and warned the Fed’s Board of Governors of the additional inflationary surge to come. Unfortunately, that is precisely what happened.
Of course, it could never happen again. Never mind, that the UAW is now asking for a 40% increase in compensation, double the 20% that the new Big 3 is currently offering. Splitting the difference works out to a 30% average that is strikingly reminiscent of the settlement of 1979 (albeit spread out over four years rather than three years as was the case back then). The impact of such a settlement is categorically dismissed by most for several reasons, the most important of which is the sharply diminished power of American labor unions.
It’s not just the dramatic decline in union membership, falling to a record low of 10.1% of US wage and salary workers in 2022, less than half the 23% rate of 1979 and well below the 35% peak of 1954. It is also the willingness to workers to trade wage pressures for job security, brought on by President Reagan’s shocking dismissal of striking air traffic controllers in August 1981—an action that opened the door to a succession of contract re-openings of previously negotiated collective bargaining agreements. It’s also the sharply reduced incidence of cost-of living adjustments (COLAs) that played an important role in fueling the interplay between price and wage cycles; the share of union workers with COLA protection fell from 58% in 1979 to 22% by 1995. And, of course, we can hardly omit the brilliant successes of the Fed’s newfound inflation-targeting wisdom.
Notwithstanding these seemingly compelling reasons to dismiss the impact of the current UAW strike, I am still intrigued by several unusual factors currently in play. Labor is now in a position of relative strength; today’s sub-4% unemployment rate stands in sharp contrast to the 6% jobless rate of late 1979. Globalization is under pressure, cutting the edge of global pressures on domestic compensation. Years of unprecedented monetary easing—maybe not so brilliant, after all—and the concomitant impacts of frothy asset markets have created a Teflon-like resilience to aggregate demand that might just lead to a sticker wage-price dynamic than most are counting on.
And Joe Biden went to Wayne County. In doing so, he delivered a pro-labor political message that feels a bit like the mirror image of Reagan’s assault on organized labor. No, it’s not 1979. But that doesn’t rule out the possibility of some disturbing rhymes some 44 years later. Never say never.
You can follow me on Twitter @SRoach_econ