President Joe Biden and former President Donald Trump are making their way to Michigan to show support for the United Auto Workers (UAW) who are currently on strike. While President Biden plans to join the striking workers on Tuesday, former President Trump will be joining them on Wednesday, causing him to skip the second Republican presidential primary debate.

The decision by these high-profile political figures to stand with the UAW is no surprise considering that most Americans also support the strikers, as indicated by recent polls.

Balancing Stronger Unions and Inflation Concerns

However, there is a delicate balance to achieve between supporting stronger unions, which can drive higher wages for workers, and the need to curb inflation. When everyone’s pay increases significantly, it becomes more challenging to control inflation.

The Interplay between Wages and Inflation

In general, higher wages lead to increased prosperity for individuals, while higher inflation rates can have adverse effects. In an ideal scenario, average wages would consistently outpace inflation, and productivity improvements would prevent wage increases from triggering inflation.

This system works well when inflation remains close to the Federal Reserve’s target of 2%. In such cases, average wages can comfortably grow by 3% to 4% annually without causing price hikes. Societies thrive when they experience gradual growth in wealth year after year.

However, this delicate balance is disrupted when there is a sudden surge in inflation, as we have recently witnessed. During these periods, workers strive to catch up by demanding substantial pay raises. This issue is exacerbated by the fact that workers’ wages have not kept up with inflation during previous years when inflation was low.

This situation explains why the UAW is now demanding a 40% pay increase over four years, which might seem excessive at first glance. However, it becomes more understandable when we recognize that workers have not seen significant raises for a prolonged period. For instance, American Airlines pilots recently secured a 46% raise, with 21% of it being allocated in the first year alone.

The Impact of Unions on Wages and Inflation

Research conducted by the Treasury Department reveals a significant advantage for workers who belong to a union – an average increase in wages between 10% and 15%. While this data highlights the positive impact on workers’ pay, there remains a delicate balance to strike between adequately compensating employees and avoiding inflationary price increases. History has taught us that attempting to combat inflation solely through increased wages can exacerbate the problem, as evidenced by the wage-price spirals of the 1970s.

It’s important to acknowledge that the number of workers represented by the UAW (United Automobile Workers) may not be substantial enough to have a widescale impact on the overall economy and inflation rates. Additionally, research conducted by the Federal Reserve indicates that larger wage demands have not been a significant driving force behind inflation thus far.

In light of these factors, President Biden can confidently support striking workers without contradicting his efforts to combat inflation. However, there is a potential risk looming in the future. If workers secure substantial wage increases this year, they may demand similar raises in subsequent years, even if inflation has subsided by then. This scenario could give rise to wage-induced inflation in the future, particularly if union influence grows after decades of decline.

Moreover, the affected companies – Ford (F), General Motors (GM), and Stellantis (STLA) – already face significant challenges. They are not at the forefront of the electric vehicle transition, which puts their future competitiveness at risk. Executives may argue against yielding to higher wage demands, as it could further jeopardize jobs for non-electric vehicle auto workers. Notably, Tesla (TSLA) workers are not unionized.

While the UAW is undoubtedly advocating for its members’ best interests, it is crucial for them to exercise caution in their pursuit of immediate gains. Overshooting now could potentially introduce a new set of complex problems in the future.

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