Wage Inflation may Force Central Bankers to Produce a Harder Recession than Most Currently Model into Investment Forecasts.

Reports that Waffle House employees demand a starting wage of $25 per hour bodes ill for the US economic fight against inflation.

A number of Waffle House Restaurants staff, negotiating under the Union of Southern Service Workers, have gone on strike, seeking a $25 hour starting wage. Should this regional chapter prevail, ultimately all of the 35,000+ employees working for the Waffle House restaurant chain will expect to receive similar levels of compensation.


In the coming month, Las Vegas NV casino and hotel employees will also finalize a wage contract or potentially declare a strike.

Las Vegas hotel and service culinary and bar-tenders unions, locals 226 & 165, covering more than 55,000 employees, are seeking a 4% wage hike annually over the 5 year term. At the end of the five year term, should this be granted, the total overall wage increase would be 4.35% per annum, before factoring in additional concessions.

Las Vegas casinos, union negotiating pay raises for workers

Over the past 70 years, US wage rates were largely driven by those possessing hard skills.

Significant personal and investment capital was expended by a minority within the US labor force to obtain the necessary degrees. Barriers to new entrants were high and total employment numbers were typically mandated, either by union, regulatory or capital barriers, to operate at a permanent, but moderate, labor deficit. The hard skill sectors operating with structural worker deficits kept up with demand by operating beyond 100% capacity through generous overtime packages, again serving the needs of those possessing the hard skill accreditations. Commercial airline pilots were able to obtain wage hikes well above that of a dishwasher, because that pilot made a significant investment in both time and money to obtain that degree. the qualification, the certification, to fly a hundred million dollar jet.

The service sector of the US economy, which represents the majority of the US labor force, primarily is populated by those with soft skills. Lacking effective barriers to entry, the soft-skill service sector has never been able to generate wage increases in-line with hard skill professions. The dishwasher understood the wage discrepancy between himself and an airline pilot. This hard skill vs soft skill differential has kept wage inflation in check for the past 50 years.

A Waffle House strike, as inconsequential as it may seem to the investing public at large, represents a forerunner, a harbinger if you will, of the potential for the US Federal Reserve board to either defeat inflation or to have it escape beyond the ability of the bank to fight it selectively, leading to a battle via other means. Should lightly skilled service personnel, in a field with absolutely no barriers to employment entry, prove successful in their goal of achieving an almost doubling of their total wage and benefit packet, then this current round of inflation ceases to be transient; it becomes permanent and can only accelerate from this level; it would accelerate due to the follow-on effect of every other restaurant employee in North America seeking the same level of wage increase.

What represents an ambition to hold the line in the sand at a 4% current rate of inflation, with a goal of bringing it down to 2%, that effectively ends should Las Vegas hotel staff achieve a gross annual wage increase of 4.35% through 2029 and the attendant follow-on effect that it will have for other hotel staff throughout North America. A 5 year contract bakes inflation forecasts in for five years out; the only way to bring inflation down after that point is through employee layoffs or through business closures. When all in North American service sectors obtain a 4% plus wage hike for a five year period, then the battle is lost. It is lost because of the math; if 20% of the US workforce possesses hard skills and are generating 8%-10% average wage hikes while the remaining 80% are obtaining 4.35% wage hikes, then the aggregate wage increase over 5 years averages 5.3% for all employed persons. You cannot beat inflation down to 4% with 5.3% wage inflation. A 2% target becomes just a dream. At 5.3% wage inflation, interest rates are not high enough today, in isolation, to destroy demand.

Service employees no longer fear for their jobs and an idle threat is no threat at all.

In the past week, an unusually high number of central bankers from Great Britain, Canada and the United States have publicly indicated that they believe inflationary pressures are no longer transient, that they may be permanent. At the US federal reserve, informal policy is for one, perhaps two, of the bankers to telegraph bank intentions regarding rate setting, serving as public proxies. This week, no less than 3 of the board have gone on the record declaring their view that rates need to move higher as soon as the October 31st view. With the inclusion of the statement by governor Michelle Bowman that rates will likely stay elevated until the end of 2025, hopes appear to be diminishing by the central bank of their ability to effect change.

What is required now by investors is a modeling of a new floor for inflation, a baseline.

The prospects of wage concessions producing an effective floor for overall inflation at a level above 4%, for years to come, is exactly what central bankers throughout the western world have been fearing in quiet halls. They fear it because corporations, in order to pay for such concessions, require that their cost of goods and services rise accordingly and include a profit margin above the cost of capital, which has shot up to 20 year highs. Should soft skill service personnel achieve wage increases for half a decade at levels above 4%, it would appear the this inflation issue may be moving beyond the ability of central bankers to control with the current tools being employed, and that suggests harder, more brutal measures, may be required.

The only way to stop wage inflation is to scare labor straight and that will only occur with actual job losses. Governments need to respond to the pleas of global central bankers and reduce spending, or this battle could become quite ugly for both capital and equity markets. At a minimum, the battle will be far more protracted than institutional and individual investors presently assume and in a protracted conflict, the risk of injury to more companies rises apace.





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