Labor strikes aren’t cheap. Equipment sits idle. Supply chains get gummed up. Workers lose wages, shareholders lose profits, governments lose tax revenue. All these effects can have an adverse impact on economic growth, employment and inflation.
Both unionized workers and their employers know the costs of work stoppages. So why don’t they reach a deal before a strike occurs? And why has there been a surge in strikes and other labor actions, which were up more than 50% in 2022 and are on track to be even higher in 2023? The answer, in a word: uncertainty.
No one really knows how much bargaining power workers have right now, which means no one knows what workers can get from employers, which means that neither side wants to prematurely concede.
The traditional way to assess a tight labor market (and therefore bargaining power) is to look at how many unemployed people are waiting to take the jobs of people who leave them. By this metric, the labor market is historically tight, with an unemployment rate near a 50-year low. The rate has been below 4% since February 2022, even though economic and job growth has slowed.
This low unemployment rate led some economists to argue last year that the US needed five years of unemployment above 5%, or that unemployment would need to reach 7.5% to beat inflation. The argument they make is that low unemployment keeps consumers spending money (which fuels inflation) and leads employers to hand out outsized wage increases (which also fuels inflation).
But this has not happened. Inflation has fallen from 9% to 3%, with unemployment remaining below 4%. And there have been very few signs that wages have sparked ongoing inflation.