Boy, Is There Ever No Wage Inflation in This Economy

June 12th, 2013 at 10:49 am

I know…you didn’t think there was…any wage inflation…in this economy.  But this is economics; you’ve got to prove it.  [For decades, when I go home and my wife says “what are you working on these days?” and I tell her, she says, “doesn’t everybody already know that?”  And I say, “Well, what do you mean by ‘know’…do you mean they think it but don’t have evidence??”  And she sadly shakes her head and gets back to other stuff…]

The figure shows a compensation series that doesn’t get a lot of press but is quite useful and comprehensive: what employers pay for employee compensation, including wages and benefits.  The lines plot out the yearly changes in nominal hourly benefits, wages, and their sum: total compensation.  Benefits tend to grow more quickly (think health costs) but they’re 30% of comp, so wages are a larger driver of the total.

You see total comp growing around 4% before the recession slammed the brakes on the rate of growth, and while there have been some wiggles, the most recent reading is around 1% (1.3%, 2012q1-2013q1)–and remember, this is average compensation, so it includes high-end earners with phat benefit packages.  That 1.3% is around the rate of inflation, so that means flat hourly comp in real terms, on average.

One question this raises is how the heck are we getting anything like the decent consumer spending numbers in recent GDP reports?  My answers are:

–these are hourly wages, so as we add jobs, we add aggregate hours worked, and that helps drive income and consumer spending;

–lately savings rates have come down so that’s another source of some spending;

–non-labor income such as capital gains and dividends are up, along with corporate profitability, and that stuff decidedly doesn’t show up in paychecks;

–increased housing wealth is probably contributing as well.

Jeez, that all sounds depressingly familiar—weak wage growth in the midst of growing inequality with consumer spending supported by housing wealth and drawing on savings.  What could go wrong?

 

totcmp

Source: BLS, ECEC

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10 comments in reply to "Boy, Is There Ever No Wage Inflation in This Economy"

  1. Kevin Rica says:

    Jared,

    No need to worry about wage inflation. The progressives of the “New America Foundation” have it (employers) covered. They brought in Tamar Jacoby (president of ImmigrationWorks USA, a national federation of small business owners) to protect against crippling labor shortages that would raise wages.

    http://online.wsj.com/article/SB10001424127887324634304578535823045836956.html

    Yes, New America Foundation’s Ms Jacoby is working hard to protect against the evil influence of Archie Bunker clinging to his guns and religion and blaming immigrants for his failure to improve his income when, in fact, it’s the business lobby and the New American Foundation that are using immigrants (with blue cards) to keep down Mr. Bunker’s income (fight wage inflation).

    Some of us old Truman Dems (if we find a fourth, we can play bridge), are skeptical of listening to Ms. Jacoby and the New America Foundation. After all as Adam Smith said:

    “Our merchants and master manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods, both at home and abroad. They say nothing concerning the bad effects of high profits; they are silent with regard to the pernicious effects of their own gains; they complain only of those of other people.”

    Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations (p. 68). Public Domain Books. Kindle Edition.


    • Jared Bernstein says:

      Awesome quote. Clearly, Adam Smith would be too radical a political economist for either party today…


  2. JohnR says:

    I’ve been seeing a poster around here for about six months in various spots – it shows a youngish black family mugging for the camera, and the caption is something to the effect “I just bought a house with only $1,000 down and bad credit!” and “fine print” underneath directing the viewer to some bank or other. Clearly the financial-services industry has learned valuable lessons from the recent minor interruption in profits and has brought in the former management of Westworld to make certain that nothing can ever again go wrong.


  3. smith says:

    The information we are missing is
    1) How low does unemployment need to go before we see any wage increase? (break it down a little by demographics because college educated unemployment is currently under 4%)

    2) Because most markets are uncompetitive (mostly oligopolies), real wage increases are passed along to consumers leading to spiraling inflation, erasing any gains. How do we address this problem?

    3) What is the effect of downwardly nominal wage rigidities? Is it masking deflationary pressure and/or the effects of immigration and outsourcing, and lower wages received by women?

    4) Does the safety net (food stamps, extended unemployment) keep people most in need from demanding real change, job programs and training instead of government assistance and tax credits,?


    • Chigliakus says:

      If you’re missing this information at this point, you haven’t been paying attention.

      1) We need really hot job markets, I’m of the opinion Kalecki showed us the way on this one.

      2) We could really use some inflation at this point, inflation can be too low well before it changes to deflation. Krugman pointed out recently “Larry Ball estimates that U.S. unemployment rates in recent years would have been, on average, 2 percentage points lower if we had entered the financial crisis with 4 percent rather than 2 percent inflation” [http://www.voxeu.org/article/case-4-inflation] Inflation erodes the real value of debt, that sure would be nice for millions of households during this period of delevraging. It’d also help with your number 3, to allow wages and prices to normalize despite downward nominal wage rigidity.

      4) What, exactly, does “demanding real change” entail? Are the proles going to build guillotines for the “let them eat cake” oligarchy of the 1% and the plutocrats of our political class? They’ve amply demonstrated they don’t care one whit for the unemployed. Realistically if we want capitalism to survive we need a safety net to smooth out the rough edges, so I’m not sure what you’re getting at here…


    • urban legend says:

      That apparently low unemployment rate for college graduates (over 25) is deceptive (4.1%). In the 1997-2000 period, the employment-to-population ratio was nearly 79%. Now it is in the 72s. That is a gigantic drop. That means huge numbers of college graduates have dropped out of the labor market. It also means a real unemployment rate for college graduates — and not even counting the part-timers for economic reasons who are grossly underemployed — is more like 10%


  4. Benedict@Large says:

    Haven’t we been proving this for like the past five years? When to we come out and say that it’s all subterfuge to keep asking for this info? A way to keep our side busy while they continue their neoliberal drive to sustain profits without putting anything back into the system that allows those profits to be sustained.


  5. Phil says:

    Unless tax and trade policies are reversed there will be no wage inflation.


  6. carlyle says:

    The wealthy European countries plus Canada and Australia have minimum wages equal to forty five to forty eight percent of their national median wage. The United States minimum wage is about twenty eight percent of our median wage. We are way behind the rest of the advanced countries in our respect for working people.


  7. Digby Geen says:

    I’d say that’s good news.

    Over time western wages need to fall while asian wages rise.

    Then there will be more of a level playing field in manufacturing.


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