IMF’s recipe to avoid a large loss of purchasing power

TV work, kindergartens, immigration, training and healthcare. The International Monetary Fund (IMF) is considering these five factors on which labor policies in large developed economies should focus in order to avoid a large loss of household purchasing power in the face of the current peak of inflation, which has accelerated in recent months. The escalation of the value of energy and raw materials in world markets due to delays caused by the war in Ukraine after the invasion of Russia.

The International Monetary Fund (IMF) warns that a price and wage spiral should be avoided, with wage refinancing at the CPI rate – which accelerated to 9.8% in Spain in March – to offset the impact of inflation on purchasing power. An increase in company expenses and an increase in the total basket of purchases, which further aggravates the disposable income of the household.

And to avoid this loop, the facility is stalling, in a report released this Thursday, on labor markets that have experienced what is known as the Great Recession since the pandemic. Those in which vacancies (unfilled jobs) are well above pre-employment levels (see chart), such as Canada, Australia, United States and the United Kingdom.

Romen Duvall, Mirto Oikonomou, and Marina m. Tavares, the economists who signed the IMF report, first explains the reasons for this large-scale resignation, which has occurred especially in the most low-paid sectors and in less-skilled jobs.

One of them is health care, which is exacerbated by a pandemic that has driven out of work most social contacts (e.g., hospitality) and also the most severe (construction or transportation) the most vulnerable. Another reason is the low arrival of immigrants in response to Covid’s lack of mobility in response, a natural substitute for jobs that require less qualifications. And also the “change of preferences” of workers after the disruption of the vitality of penitentiary, which translated into the demand for better working conditions. A trend that, in turn, contributes to accumulated savings and greater state aid.

The main result of these changes in the labor market on the supply side (workers) was an increase in wages in those sectors and jobs where they were lowest before the pandemic. “The annual wage growth rate has risen from 4 to 6 percentage points between mid-2020 and the end of 2021,” said IMF experts for the United States and the United Kingdom.

“However, this improvement in wages hardly means an increase in purchasing power [la capacidad para comprar respecto a los precios] “Due to the effects of inflation,” economists continue.

The IMF’s solution to this threat to households, which is already being seen in a large economy, is to revitalize the labor market. And the recipe is to reverse the effects of the pandemic. On the one hand, more health care, which restores interest in more social work for older workers and the most vulnerable. On the other hand, promoting remote work for the same purposes and trying to meet the expectation of better working conditions.

In addition, economists are talking about strengthening schools and kindergartens to promote work-life balance, which has been severely affected by the pandemic, which is affecting women’s employment in the first place. Finally, “update” immigration.

“New expectations” after the pandemic

“Labor markets with fewer and more jobs are good news in some developed economies. Wages have risen, especially for low-wage workers, which has a manageable impact on price inflation (growth was largely driven by other factors), ”said IMF economists.

“But some workers who left during the pandemic have not yet returned, and some have constant concerns about their current jobs and new expectations that limit job delivery. By doing more to help these workers, governments can make the recovery of the labor market more inclusive while reducing the risks of inflation. ”