It seems the world’s financial markets have stabilized for now, but we’re still seeing all the pieces that were written with the expectation of a further plunge that were already in the pipeline, such as this front page piece in the NYT. I don’t mean to mock all these writings. The market certainly could take another plunge since prices are high, but they do provide a useful way to see the extent to which people are focused on real versus imagined fears.

As I have noted elsewhere, the obsession with inflation is clearly overblown. Not only is it not visible in the data, it is not visible in people’s expectations. As investors were supposedly dumping stock because of inflationary fears, the gap between the interest rate on government bonds and inflation-indexed bonds barely budged. This gap should be a pretty good measure of inflationary expectations and presumably there is considerable overlap between the people who invest in the stock market and people who invest in the bond market.

Apart from inflation, there is another aspect of the higher wage growth reported last Friday that did not get as much attention. Actually, there was not much of a jump in wages in any case. The year over year change in the average hourly wage was reported at 2.9 percent. Twice in the last two years it has been 2.8 percent. The increase in the average hourly wage for production and non-supervisory workers, a group that includes more than 80 percent of the workforce, was just 2.4 percent.

But let’s assume wages actually are growing more rapidly, which is what we would expect as the labor market tightens. While this could translate into inflation, it could also cut into corporate profit margins. There has been a large shift from labor to capital since 2005. It is reasonable to expect that this will be at least partially reversed as workers gain bargaining power.

This shift back to labor is good news for the vast majority of the population who get the overwhelming majority of their income from wages. However, it does mean lower profits and this is bad news for the stock market. In principle the stock market is the value of future corporate profits. If profits over the next decade will be 10 to 20 percent lower as a result of a shift back to labor, then we would expect the market to be 10 to 20 percent lower, other things equal (yes, other things are never equal).