Category: Microeconomics

Technological Change Smacks Snacks

Photo from cnbc.com

What causes consumer demand for a product to decline?  Why does demand for some products suddenly rise?  As we discuss in Chapter 3, changes in the relative price of a substitute or a complement cause the demand for a good to shift. For instance, the following figure shows the recent rapid increase in the price of eggs, due in part from the spread of bird flu. We would expect that the increase in the price of eggs will shift to the right the demand curve for egg substitutes, such as the product shown below the figure.

Sometimes a shift in the demand for a product represents a change in consumer tastes. For instance, as we discuss in an Apply the Concept in Chapter 3, for decades most people wore a hat while outdoors. The first photo below shows people walking down a street in New York City in the 1920s. Beginning in the 1960s, hats started to fall out of fashion. As the second photo shows, today few people wear hats—unless they’re walking outside during the winter in the Northeast or the Midwest!

Photo from the New York Daily News

Photo from the New York Times

Technological change can also affect the demand for goods. For example, the development of network television, beginning in the late 1940s, reduced the demand for tickets to movie theaters. Similarly, the development of the internet reduced the demand for physical newspapers.

A recent example of technological change having a substantial effect on a number of consumer goods is the introduction of GLP–1 drugs, beginning in 2005. These drugs, such as Ozempic and Mounjaro, were first developed to treat type 2 diabetes. The drugs were found to significantly reduce appetite in most users, leading to users losing weight. Accordingly, doctors began to prescribe the drugs to treat obesity. By 2025, about half of the users of GLP–1 drugs were doing so to lose weight. A recent article in the Washington Post quoted Jan Hatzius, chief economist at Goldman Sachs, as predicting that by 2028, 60 million people in the United States will be taking a GLP–1 drug.

Many consumers who use these drugs decide to change the mix of foods they eat. Typically, users demand fewer ultra-processed foods, such as chips, cookies, and soft drinks. The percentage of people in the United States who are considered obese—having a body mass index (BMI) of 30 or greater—had been increasing for decades before declining slightly in 2023, the most recent year with available data. It seems likely that the increasing use of GLP–1 drugs helps to explain the decline in obesity.

People taking these drugs have also typically increased the share of foods they eat with higher levels of protein and fiber. These changes in diet are likely to lead to improved health, reducing the demand for some medical services. The number of people experiencing significant weight loss has already begun to reduce demand for extra-large clothing sizes and increase the demand for medium clothing sizes.

How much has the use of Ozempic and similar drugs reduced the demand for snacks? A recent study by Sylvia Hristakeva and Jura Liaukonyt of Cornell University and Leo Feler of Numerator, a market research firm, presents numerical estimates of changes in demand for different foods by users of GLP–1 drugs. The authors assembled a representative sample of 150,000 U.S. households and the households’ grocery purchases from July 2022 through September 2024. They estimate that the share of the U.S. population using a GLP–1 drug increased from 5.5% in October 2023 to 8.8% in July 2024.

The study finds that households with at least one person using a GLP–1 drug reduced their total grocery shopping by 5.5 percent or $416. The study gathered data on changes in the categories of food that households were buying six months after at least one person in the household began using one of these drugs. The figure below is compiled from data in the study.

As expected, purchases of snacks declined. The category of “chips and other savor snacks” (bottom row in the figure) declined by more than 11 percent. Purchases of sweet bakery products, cheese, cookies, soft drinks, ice cream, and pasta all declined by more than 5 percent. Purchases of yogurt, fresh produce, meat snacks, and nutrition bars, all increased. An article in the Wall Street Journal noted that “food makers are starting to understand better and cater to, in some cases with products specifically designed for” users of this drug. The image below shows some of the new products that Nestle—a major candy producer—has introduced to appeal to users of GLP–1 drugs. Nestle’s Vital Pursuit line of frozen packaged foods contain high levels of protein and fiber.

It’s too early to gauge the full effects of GLP–1 drugs on consumer demand. But it’s already clear that GLP–1 drugs are a striking example of technological change affecting demand in a major industry

Interesting Example of Price Discrimination at Walt Disney World

The pool at the All-Star Movie resort at Walt Disney World in Orlando, Florida (Photo from touringplans.com)

A recent article in the Wall Street Journal has the headline “Even Disney Is Worried About the High Cost of a Disney Vacation.” According to the article, “Some inside Disney worry that the company has become addicted to price hikes and has reached the limits of what middle-class Americans can afford ….”

As we discuss in Microeconomics, Chapter 15, the Walt Disney Company engages in price discrimination in a number of ways, by, for instance, charging more for ticket prices to its theme parks during the end-of-year holidays than on other days. Disney also offers hotels at different price levels, ranging from deluxe hotels like the Grand Floridian to more basic value hotels like the All-Star Movie Resort. In the case of hotels, some of the price difference is explained by differences in operating cost. Luxury hotels tend to have more amenities, including larger pools and restaurants on site, which raises their costs. Part of the difference in price, though, is the result of Disney estimating that people with higher incomes have a more inelastic demand for hotels than do people with lower incomes.

The Wall Street Journal article relies in part on data provided by Len Testa on his site touringplans.com. He notes that between 2018 and 2025, the percentage increase in the price Disney charged for staying at a value resort was less than the rate of inflation. In other words, the real price—the nominal price corrected for the effects of inflation—of staying at a Disney value resort decreased during that period. On the other hand, the percentage increase in the price Disney charged for staying at a deluxe was more than the rate of the inflation. So, the real price of staying at a Disney deluxe resort increased during this period.

One interpretation of these data is that over this period, Disney increased the extent of the price discrimination it was practicing with respect to hotel prices. It increased the gap between the price the families with more inelastic demand for Disney hotels pay and the price families with more elastic demand for Disney hotels pay. The article quotes Josh D’Amaro, who is the Disney executive in charge of the company’s theme parks, as saying “we intentionally offer a wide variety of ticket, hotel and dining options to welcome as many families as possible, whatever their budget.”

DeepSeek, Nvidia, and the Effect of New Information on Stock Prices

At the close of stock trading on Friday, January 24 at 4 pm EST, Nvidia’s stock had a price of $142.62 per share. When trading reopened at 9:30 am on Monday, January 27, Nvidia’s stock price plunged to $127.51. The total value of all Nvidia’s stock (the firm’s market capitalization or market cap) dropped by $589 billion—the largest one day drop in market cap in history. The following figure from the Wall Street Journal shows movements in Nvidia’s stock price over the past six months.

What happened to cause should a dramatic decline in Nvidia’s stock price? As we discuss in Macroeconomics, Chapter 6 (Economics, Chapter 8, and Money, Banking, and the Financial System, Chapter 6), Nividia’s price of $142.62 at the close of trading on January 24—like the price of any publicly traded stock—reflected all the information available to investors about the company. For the company’s stock to have declined so sharply at the beginning of the next trading day, important new information must have become available—which is exactly what happened.

As we discussed in this blog post from last October, Nvidia has been very successful in producing state-of-the-art computer chips that power the most advanced generative artificial intelligence (AI) software. Even after Monday’s plunge in the value of its stock, Nvidia still had a market cap of nearly $3.5 trillion at the end of the day. It wasn’t news that DeepSeek, a Chinese AI company had produced AI software called R1 that was similar to ChatGTP and other AI software produced by U.S. companies. The news was that R1—the latest version of the software is called V3—appeared to be comparable in many ways to the AI software produced by U.S. firms, but had been produced by DeepSeek despite not using the state-of-the-art Nvidia chips used in those AI programs.

The Biden administration had barred export to China of the newest Navidia chips to keep Chinese firms from surging ahead of U.S. firms in developing AI. DeepSeek claimed to have developed its software using less advanced chips and have trained its software at a much lower cost than U.S. firms have been incurring to train their software. (“Training” refers to the process by which engineers teach software to be able to accurately solve problems and answer questions.) Because DeepSeek’s costs are lower, the company charges less than U.S. AI firms do to use its computer infrastructure to handle business tasks like responding to consumer inquiries.

If the claims regarding DeepSeek’s software are accurate, then AI firms may no longer require the latest Nvidia chips and may be forced to reduce the prices they can charge firms for licensing their software. The demand for electricity generation may also decline if it turns out that the demand for AI data centers, which use very large amounts of power, will be lower than expected.

But on Monday it wasn’t yet clear whether the claims being made about DeepSeek’s software were accurate. Some industry observers speculated that, despite the U.S. prohibition on exporting the latest Nvidia chips to China, DeepSeek had managed to obtain them but was reluctant to admit that it had. There were also questions about whether DeepSeek had actually spent as little as it claimed in training its software.

What happens to the price of Nvidia’s stock during the rest of the week will indicate how investors are evaluating the claims DeepSeek made about its AI software.

1/17/25 Podcast – Authors Glenn Hubbard & Tony O’Brien discuss the pros/cons of tariffs and the impact of AI on the economy.

Welcome to the first podcast for the Spring 2025 semester from the Hubbard/O’Brien Economics author team. Check back for Blog updates & future podcasts which will happen every few weeks throughout the semester.

Join authors Glenn Hubbard & Tony O’Brien as they offer thoughts on tariffs in advance of the beginning of the new administration. They discuss the positive and negative impacts of tariffs -and some of the intended consequences. They also look at the AI landscape and how its reshaping the US economy. Is AI responsible for recent increased productivity – or maybe just the impact of other factors. It should be looked at closely as AI becomes more ingrained in our economy.

https://on.soundcloud.com/8ePL8SkHeSZGwEbm8

Did Stephen King Stumble into One of Our “Pitfalls in Decision Making”?

The cover of Steven King’s novel The Stand. (Image from amazon.com)

In Microeconomics, Chapter 10, we have a section on “Pitfalls in Decision Making.” One of those pitfalls is the failure to ignore sunk costs. A sunk cost is one that has already been paid and cannot be recovered.

In his book On Writing: A Memoir of the Craft, King discusses his writing of The Stand (a book he describes as “the one my longtime readers still seem to like the best.”) At one point he had had trouble finishing the manuscript and was considering whether to stop working on the novel:

“If I’d had two or even three hundred pages of single-spaced manuscript instead of more than five hundred, I think I would have abandoned The Stand and gone on to something else—God knows I had done it before. But five hundred pages was too great an investment, both in time and in creative energy; I found it impossible to let go.”

King seems to have committed the error of ignoring sunk costs. The time and creative energy he had put into writing the 500 pages were sunk—whether he abandoned the manuscript or continued writing until the book was finished, he couldn’t get back the time and energy he had expanded on writing the first five hundred pages.  That he had already written 300 pages or 500 pages wasn’t relevant to his decision because if a cost is sunk it doesn’t matter for decision making whether the cost is large or small.

Is it relevant in assessing King’s decision that in the end he did finish The Stand, the novel sold well—earning King substantial royalties—and his fans greatly admire the novel? Not directly because only with hindsight do we know that The Stand was successful. In deciding whether to finish the manuscript, King shouldn’t have worried about the cost of the time and energy he had already spent writing it. Instead, King should have compared the expected marginal cost of finishing the manuscript with the expected marginal benefit from completing the book. Note that the expected marginal benefit could include not only the royalty earnings from sales of the books, but also the additional appreciation he received from his fans for writing what turned out to be their favorite novel.

When King paused working on the manuscript after having written 500 pages, the marginal cost of finishing was the opportunity cost of not being able to spend those hours and creative energy writing a different book. Given the success of The Stand, the marginal benefit to King from completing the manuscript was almost certainly greater than the marginal cost. So, completing the manuscript was the correct decision, even if he made it for the wrong reason!

The Southern California Wildfires and Problems in the Insurance Industry 

Fire damage in the Pacific Palisades. (Photo from Reuters via the Wall Street Journal)

As of January 15, the series of devastating wildfires in Southern California have killed at least 25 people and destroyed billions of dollars’ worth of homes and businesses. Adding to the tragedy is the fact that many homeowners aren’t fully insured against the damage. As a result, they lack the necessary funds to rebuild their homes. Unfortunately for these people, the market for fire insurance in California hasn’t been working well. 

In the United States, regulation of property and casualty insurance occurs at the state level with regulations differing substantially across states. In California, insurance companies face an unusually long regulatory process to receive permission to increase the premiums they charge. The delays in raising premiums have contributed to companies not renewing property insurance policies in some areas, such as those prone to wildfires. In these areas, the payouts the companies expect to make have been higher than the premiums that California regulators have allowed companies to charge policyholders.

The wildfires have ravaged the Pacific Palisades neighborhood of Los Angeles . Although housing prices in the neighborhood are among the highest in the country, an analysis by the Reuters news agency showed that: “Measured against home values, insurance costs are cheaper in the Palisades than in 97% of U.S. postal codes …” For example, the median insurance premium in the Pacific Palisades was “less than residents paid in Glencoe, Illinois, an upscale suburb of Chicago where homes are two-thirds cheaper and the risk of wildfire is minimal.”

Catastrophe modeling is a way of statistically forecasting the probability of events—such as floods or wildfires—occurring that would sharply increase claims by policyholders. Regulations had barred insurance companies from using catastrophe modeling to justify increases in premiums. (State regulators lifted the prohibition on the use of catastrophe modeling shortly before the fires.) These restrictions made it more difficult for companies to charge risk-based premiums, which are based on the probability that a policyholder will file a claim.

Insurance markets can experience adverse selection problems because the people most eager to buy insurance are those with highest probability of requiring an insurance payout. Insurance companies attempt to reduce adverse selection problems by, among other things, charging risk-based premiums. Limiting the ability of insurance companies to charge risk-based premiums increased the adverse selection problems the companies face. To cope with the problem of companies not renewing policies, regulators began requiring companies to renew policies in some Zip codes, particularly those that were in or near areas that had experienced wildfires. This policy further increased adverse selection.

By 2023, some insurers, including State Farm and Allstate—which are two of the largest property insurers in the United States—had decided that they were unlikely to be able cover their costs from offering property insurance policies in California and stopped writing policies in the state. Policyholders who are unable to obtain a policy from a private insurance company typically buy a policy offered through the Fair Access to Insurance Requirements (FAIR) Plan. The FAIR Plan is sponsored by the state government, although operated by private insurance companies. The premiums charged for a FAIR Plan policy are significantly higher than the premiums charged for a traditional policy. Despite the higher premiums, the number of FAIR Plan policies doubled between 2020 and 2025, reaching nearly 500,000. 

The FAIR Plan lacks sufficient funds to pay the claims from policyholders who had lost their homes or businesses in the Southern California wildfires. To cover the deficit, the FAIR Plan will assess private insurance companies, who, in turn, will raise premiums charged to their other policyholders. In this way, some of the costs from the wildfires will be borne by all property insurance policyholders in California, even if they live far from the areas affected by the wildfires.

We discuss moral hazard in insurance markets in Microeconomics and Economics, Chapter 7 (and in Money, Banking, and the Financial System, Chapter 11). In general, moral hazard refers to actions people take after they have entered into a transaction that make the other party to the transaction worse off. Moral hazard in insurance markets occurs when people change their behavior after becoming insured. The way that the insurance market is regulated in California and, in particular, the way that the FAIR Plan is administered increases moral hazard because people who own homes or businesses in areas with a greater risk of damage from wildfires don’t pay premiums that fully reflect that greater risk. In other words, more people live in fire prone areas in California than would do so if the premiums on their insurance policies fully reflected the probability of their making a claim.

Whether, following the wildfires, the California legislature will change the regulations governing the insurance market is unclear at this point. As an insurance agent quoted by the Wall Street Journal put it: “We are in uncharted territory.”

Why Were Glenn and Tony Particularly Happy in 2024?

Because inflation in chocolate chip cookie prices ended, or course! In December 2023, the average retail price of a pound of chocolate chip cookies (even we try not to eat a pound of cookies in one sitting!) was $5.12. In November 2024, the price had declined to $4.92 per pound. As the following figure shows, the days of 20 percent annual inflation in chocolate chip cookie inflation that lasted from September 2022 to April 2023 are behind us—at least for now.

The following figure shows annual inflation in overall food prices as measured by the percentage change in the food component of the consumer price index (CPI) from the same month in the previous year. During 2024, food inflation has been running at an annual rate of between 2.0 percent and 2.5 percent. In contrast, chocolate chip cookies actually experienced deflation of –1.1 percent. So, the price of chocolate chip cookies relative to the prices of other food products declined by more than did the absolute price.

We were led to contemplate chocolate chip cookie prices by this article in the New York Times that discusses the FRED data set. (A subscription may be required to access the article.) Like many other economists, we heavily use the FRED site and greatly appreciate the efforts of those at the Federal Reserve Bank of St. Louis who have made this data resource available.

The Curious Case of the GE Refrigerators

Is the refrigerator above different from the refrigerator below?

Consumer Reports is a magazine and web site devoted to product reviews. Their November-December 2024 issue noted something unusual about the two GE refrigerators shown above. (The images are from the geappliances.com web site.) At the time the issue was printed, the first refrigator above had a price of $2,300 and the second refrigerator had a price of $1,300: Consumer Reports notes that:

“These look-alike fridges offer equally impressive performance, have the same interior features … and are from the same brand. So why the $1,000 price difference? We don’t know.”

(Note: GE referigators, and many other products branded with the GE name are no longer produced by the General Electric company, which dates back to 1892 and was co-founded by Thomas Edison. Today, GE is primarily an aerospace company and GE appliances are produced by the Chinese-owned Haier Smart Home Company.)

If we assume that Consumer Reports is correct and the two refrigerators are identical, what strategy is the firm pursuing by charging different prices for the same product? As we discuss in Microeconomics, Chapter 15, Section 15.5 firms can increase their profits by practicing price discrimination—charging different prices to different customers. To pursue a strategy of price discrimination the firm needs to be able to divide up—or segment—the market for its refrigerators.

Firms sometimes use a high price to signal quality. The old saying “you get what you pay for” can lead some consumers to expect that when comparing two similar goods, such as two models of refrigerators, the one with the higher price also has higher quality. In the appliance section of a large store, such as Lowe’s or the Home Depot, or online at Amazon or another site, you will have a wide variety of refrigerators to choose from. You may have trouble evaluating the features each model offers and be unable to tell whether a particular model is likely to be more or less reliable. So, if you are choosing between the two GE models shown above, you may decide to choose the one with the higher price because the higher price may indicate that the components used are of higher quality.

In this case, GE may be relying on a segmentation in the market between consumers who carefully research the features and the quality of the refrigerators that different firms offer for sale and those consumers don’t. The consumers who do careful research and are aware of all the features of each model may be more sensitive to the price and, therefore, have a high price elasticity of demand. The consumers who haven’t done the research may be relying on the price as a signal of quality and, therefore, have a lower price elasticty of demand.

If what we have just outlined was the firm’s strategy for increasing profit by charging different prices for two models that are, apparently, either identical or very similar, it doesn’t seem to have worked. Note that the model shown in the first photo above is the one that had a price of $2,300 when Consumer Reports wrote about it, but now has a price of $1,154.40. The model shown in the second photo had a price of $1,300, but now has a price of $1,399.00. In other words, the model that had the lower price now has the higher price and the model that had the higher price now has the lower price.

What happened between the time the issue of Consumer Reports published and now? We might conjecture that there are few consumers who would be likely to pay $1,000 more for a refrigator that seems to have the same features as another model from the same company. In other words, segmenting consumers in this way seems unlikely to succeed. Why, though, the firm decided to make its formerly higher-price model its lower-price model, is difficult to explain without knowing more about the firm’s pricing strategy.

The Amazing Rise of Nvidia

Nvidia’s headquarters in Santa Clara, California. (Photo from nvidia.com)

Nvidia was founded in 1993 by Jensen Huang, Chris Malachowsky, and Curtis Priem, electrical engineers who started the company with the goal of designing computer chips that would increase the realism of images in video games. The firm achieved a key breakthrough in 1999 when it invented the graphics processing unit, or GPU, which it marketed under the name GeForce256. In 2001, Microsoft used a Nvidia chip in its new Xbox video game console, helping Nvidia to become the dominant firm in the market for GPUs.

The technology behind GPUs has turned out to be usable not just for gaming, but also for powering AI—artificial intelligence—software. The market for Nvidia’s chips exploded witth technology giants Google, Microsoft, Facebook and Amazon, as well as many startups ordering large quantites of Nvidia’s chips.

By 2016, Nvidia CEO Jen-Hsun Huang could state in an interview that: “At no time in the history of our company have we been at the center of such large markets. This can be attributed to the fact that we do one thing incredibly well—it’s called GPU computing.” Earlier this year, an article in the Economist noted that: “Access to GPUs, and in particular those made by Nvidia, the leading supplier, is vital for any company that wants to be taken seriously in artificial intelligence (AI).”

Nvidia’s success has been reflected in its stock price. When Nvidia became a public company in 1999 by undertaking an initial public offering (IPO) of stock, a share of the firm’s stock had a price of $0.04, adjusted for later stock splits. The large profits Nvidia has been earning in recent years have caused its stock price to rise to more than $140 dollars a share.

(With a stock split, a firm reduces the price per share of its stock by giving shareholders additional shares while holding the total value of the shares constant. For example, in June of this year Nvidia carried out a 10 for 1 stock split, which gave shareholders nine shares of stock for each share they owned. The total value of the shares was the same, but each share now had a price that was 10 percent of its price before the split. We discuss the stock market in Microeconomics, Chapter 8, Section 8.2, Macroeconomics, Chapter 6, Section 6.2, and Economics, Chapter 8, Section 8.2.)

The following figure from the Wall Street Journal shows the sharp increase in Nvidia’s stock price over the past three years as AI has become an increasingly important part of the economy.

Nvidia’s market capitalization (or market cap)—the total value of all of its outstanding shares of stock—is $3.5 trillion.  How large is that? Torsten Sløk, the chief economist at Apollo, an asset management firm, has noted that, as shown in the following figure, Nvidia’s market cap is larger than the total market caps—the total value of all the publicly traded firms—in five large economies.

Can Nvidia’s great success continue? Will it be able to indefinitely dominate the market for AI chips? As we noted in Apply the Concept “Do Large Firms Live Forever?” in Microeconomics Chapter 14, in the long run, even the most successful firms eventually have their positions undermined by competition. That Nvidia has a larger stock market value than the total value of all the public companies in Germany or the United Kingdom is extraordinary and seems impossible to sustain. It may indicate that investors have bid up the price of Nvidia’s stock above the value that can be justified by a reasonable forecast of its future profits.

There are already some significant threats to Nvidia’s dominant position in the market for AI chips. GPUs were originally designed to improve computer displays of graphics rather than to power AI software. So, one way of competing with Nvidia that some startups are trying to exploit is to design chips specifically for use in AI. It’s also possible that larger chips may make it possible to use fewer chips than when using GPUs, possibly reducing the total cost of the chips necessary to run sophisticated AI software. In addition, existing large technology firms, such as Amazon and Microsoft, have been developing chips that may be able to compete with Nvidia.

As with any firm, Nvidia’s continued success requires it to innovate sufficiently to stay ahead of the many competitors that would like to cut into the firm’s colossal profits.

Want a Raise? Get a New Job

Image generated by GTP-4o of someone searching online for a job

It’s become clear during the past few years that most people really, really, really don’t like inflation. Dating as far back as the 1930s, when very high unemployment rates persisted for years, many economists have assumed that unemployment is viewed by most people as a bigger economic problem than inflation. Bu the economic pain from unemployment is concentrated among those people who lose their jobs—and their families—although some people also have their hours reduced by their employers and in severe recessions even people who retain their jobs can be afraid of being laid off.

Although nearly everyone is affected by an increase in the inflation rate, the economic losses are lower than those suffered by people who lose their jobs during a period in which it may difficult to find another one. In addition, as we note in Macroeconomics, Chapter 9, Section 9.7 (Economics, Chapter 19, Section 19.7), that:

“An expected inflation rate of 10 percent will raise the average price of goods and services by 10 percent, but it will also raise average incomes by 10 percent. Goods and services will be as affordable to an average consumer as they would be if there were no inflation.”

In other words, inflation affects nominal variables, but over the long run inflation won’t affect real variables such as the real wage, employment, or the real value of output. The following figure shows movements in real wages from January 2010 through September 2024. Real wages are calculated as nominal average hourly earnings deflated by the consumer price index, with the value for February 2020—the last month before the effects of the Covid pandemic began affecting the United States—set equal to 100. Measured this way, real wages were 2 percent higher in September 2024 than in February 2020. (Although note that real wages were below where they would have been if the trend from 2013 to 2020 had continued.)

Although increases in wages do keep up with increases in prices, many people doubt this point. In Chapter 17, Section 17.1, we discuss a survey Nobel Laurete Rober Shiller of Yale conducted of the general public’s views on inflation. He asked in the survey how “the effect of general inflation on wages or salary relates to your own experience or your own job.” The most populat response was: “The price increase will create extra profifs for my employer, who can now sell output for more; there will be no increase in my pay. My employer will see no reason to raise my pay.”

Recently, Stefanie Stantcheva of Harvard conducted a survey similar to Schiller’s and received similar responses:

“If there is a single and simple answer to the question ‘Why do we dislike inflation,’ it is because many individuals feel that it systematically erodes their purchasing power. Many people do not perceive their wage increases sufficiently to keep up with inflation rates, and they often believe that wages tend to rise at a much slower rate compared to prices.”

A recent working paper by Joao Guerreiro of UCLA, Jonathon Hazell of the London School of Economics, Chen Lian of UC Berkeley, and Christina Patterson of the University of Chicago throws additional light on the reasons that people are skeptical that once the market adjusts, their wages will keep up with inflation. Economists typically think of the real wage as adjusting to clear the labor market. If inflation temporarily reduces the real wage, the nominal wage will increase to restore the market-clearing value of the real wage.

But the authors of thei paper note that, in practice, to receive an increase in your nominal wage you need to either 1)ask your employer to increase your wage, or 2) find another job that pays a higher nominal wage. They note that both of these approachs result in “conflict”: “We argue that workers must take costly actions (‘conflict’) to have nominal wages catch up with inflation, meaning there are welfare costs even if real wages do not fall as inflation rises.” The results of a survey they undertook revealed that:

“A significant portion of workers say they took costly actions—that is, they engaged in conflict—to achieve higher wage growth than their employer offered. These actions include having tough conversations with employers about pay, partaking in union activity, or soliciting job offers.”

Their result is consistent with data showing that workers who switch jobs receive larger wage increases than do workers who remain in their jobs. The following figure is from the Federal Reserve Bank of Cleveland and shows the increase in the median nominal hourly wage over the previous year for workers who stayed in their job over that period (brown line) and for workers who switched jobs (gray line).

Job switchers consistently earn larger wage increases than do job stayers with the difference being particularly large during the high inflation period of 2022 and 2023. For instance, in July 2022, job switchers earned average wage increases of 8.5 percent compared with average increases of 5.9 percent for job stayers.

The fact that to keep up with inflation workers have to either change jobs or have a potentially contentious negotiation with their employer provides another reason why the recent period of high inflation led to widespread discontent with the state of the U.S. economy.