What’s Going Down with Real Wages?

May 18th, 2011 at 5:38 pm

I agree with Krugman that when it comes to the economy, we’re mostly worrying about the wrong stuff.  Paul stressed jobs over current deficits, but here’s something else to legitimately wring your hands about: real wages—pay adjusted for inflation—are recently in decline for most workers.

What’s that?  You thought they’ve been falling for a while?  Not so.  That is, if you had a job, even though your paycheck probably wasn’t growing much, inflation was low enough that real earnings kept rising through last year.

But lately, with gas and other commodity prices rising more quickly (as opposed to core inflation, which remains tame), there’s been a collision between slower nominal wage growth and faster price growth.  As of last month, real weekly earnings were about $13 off their peak last October.  That’s over $600 a year for a full-year worker.

 

Anyway, this has serious implications both for families’ living standards and the overall economy.  One of the reasons higher gas prices lead to slower overall growth is because it means people have less to spend elsewhere (and since we import half of the oil we consume, there’s a lot of import leakage here too which doesn’t help either).

More employment and hours worked per week helps—note that weekly earnings grow a little faster than hourly in the chart; that’s a function of increased hours’ growth.

But what would help more is lower unemployment (so Paul’s right to focus on jobs) and more pressure in the job market to induce employers to bid wages up a bit, allowing workers throughout the pay scale to capture more of the economy’s real growth.

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15 comments in reply to "What’s Going Down with Real Wages?"

  1. Gentil Aquitaine says:

    Real wages have been on a steady decline since 1980. They manifested a slight uptick in the 90s but still have not reached the level at which were prior to the Reagan Era. Real Wages, in fact, peaked in 1978.

    Still more shocking than this steady decline, however, is the extent to which earnings of top 1% have gone through the roof during this same period. Insane amounts of the nation’s wealth have been transfered its richest individuals who, by and large do not reinvest their surplus in business ventures(one way of saying ‘Trickle-Down doesn’t trickle’) but lay it way in bonds or hide it in offshore accounts.

    The hypotheses of Trickle-Down or ‘Voodoo’ economics have been empirically proven false in the 30 year pseudo-science experiment our nation’s leadership has been conducting since the Reagan Era began.

    It is time to re-evaluate.


    • Bobloblaw says:

      “”Real wages have been on a steady decline since 1980. They manifested a slight uptick in the 90s but still have not reached the level at which were prior to the Reagan Era. Real Wages, in fact, peaked in 1978.”"

      Totally incorrect. Nice try to blame Reagan. Real Wages peaked in 1973 and by 1980 had declined by 10%. The worst years for real wage growth were 1974-75 and 1978-82. Real Wage growth was strong in the late 1990s and for a period in the mid 1980s. There is in fact a strong negative correlation between real wages and monetary policy. Loose monetary policy corresponds to real wage declines.

      http://www.workinglife.org/wiki/Wages+and+Benefits:+Real+Wages+%281964-2004%29


  2. Jeanette Castillo says:

    It’s amazing to me how rare it is to hear anyone argue this very critical point. How does the consumer economy recover when the consumer cannot consume? Depressed wages force people to use credit cards for prescription drugs, groceries and other necessities, and pay for them at 20% interest. Absolutely unsustainable, even in the short term.


  3. Steven Dreyer says:

    This recent trend is important and alarming.

    I have to agree with the comment that these also need long-term perspective. Bernstein’s old organization, Economic Policy Institute, contained his very well-researched work on this. These data might be useful here.

    Robert Reich addresses the long-term real wages issue by pointing out that conservative politicians first allowed previously less significant household income from women (newer to the workforce in number) to make it appear household wages were not declining, and later personal debt was encouraged to keep lifestyle/wages appearing as if they were not in decline for families (robertreich.org). The truth, as Bernstein shows, is also real wages have been in decline for some time. Corporations have been moving jobs out of the US while profits have shot up recently, thus fueling a further decline.

    Steven C. Dreyer


  4. Kevin Rica says:

    This is not surprising. There used to be a political party in this country back in the days of Harry Truman that defended the interests of the “working man.” It was called the Democrats.

    But that issue is of only of secondary importance to the modern Democratic Party. It has higher priorities – like forging a common front with the business lobby to bring in Gastarbeiter – “Guest Workers:” the desperate overflow of the Third World’s population, willing to take the hardest job at a poverty level wage with no health insurance.

    So in the middle of a collapse of the job market, with unemployment sky high (a huge surplus of labor), the modern Dems and the Chamber of Commerce are wailing and wetting their undies over “a shortage of labor.” Well, you can’t have both a “shortage of labor” and unemployment at the same time. The former means “more jobs than workers” and the latter means “more workers than jobs.” These are mutually exclusive conditions. The Dems are telling everyone to ignore the most obvious characteristic of the current economy so that they can promote more immigration. Not just the so-called “path to citizenship” for illegal immigrants already here, but even more unneeded workers who haven’t arrived yet.

    Why does the U.S. economy need still more unskilled laborers in the middle of a recession that is crushing unskilled workers? A “shortage of labor” is normally only a danger to an economy in time of war when the generals need more infantry and war plants need more workers. It’s obvious why the Chamber of Commerce fears a “shortage of labor.” In peacetime, a shortage of labor forces employers to compete for workers by improving working conditions, offering medical plans and other benefits, and RAISING WAGES. It is the normal mechanism that raises wages, in real life and in the mathematical models of economists. In short, a shortage of labor redistributes income from the rich to the poor.

    And the modern “Democratic Party” has formed an alliance with the Chamber of Commerce to suppress labor shortages with “Guest Workers” (who will never leave and never be economically self-sufficient). It has jammed the mechanism that raises wages.

    So who is left to defend to defend the wages of workers?


    • Bobloblaw says:

      “”Why does the U.S. economy need still more unskilled laborers in the middle of a recession that is crushing unskilled workers”"

      I am seeing unskilled positions advertised that pay $9-10 per hour. The same jobs in the early 1990s paid EXACTLY the same. A real wage decline of over 33%.


  5. Commentator says:

    Obama and the Democrats spent $1T and even in their best case scenario “saved” (hah) or created 3-4 million jobs. That’s laughable econometrics to begin with, but even so that means they spend $250,000-$340,000 per job created, wasting the taxpayer and the people’s hard earned money and previously excellent prospects on pork, pork, and more pork; vast swaths of it being kicked back into Democratic Party coffers. After all, that was the plan, was it not?

    The way to get the economy going again is to put the wealth back in the hands of those who hire like Reagan did and George W. Bush did. Note, even Clinton left in place 95% of Reagan’s tax cuts only marginally increased taxes on the top bracket.

    What Obama and the Democrats have done is not Keynesianism, but Sociocronyism. It’s a disgrace.

    And Mr. Bernstein, W. made the tax systme more progressive not less. I fumed whenever you made that mistake on Kudlow. He cut taxes more proportionately on behalf of the poorest and middle income. That’s why ending those W. cuts hurts them the most.

    Also, those are average wages going down, not individual wages. People’s personal wages have been going up overwhelimingly throughout the last 50 years and maybe always. Democrats always confuse that statistic.


    • Kevin Rica says:

      Commentator,

      WHY WOULD ONE HOLD UP “W” AS AN EXAMPLE OF ANYTHING TO DO?

      Whatever else Obama has done, he left Bin Laden sliding off a board in free fall to the bottom of the ocean.

      When Clinton took office, there was a mild recession and a huge budget deficit.

      Clinton raised taxes.

      When Clinton left office 8 years later there was a mild recession and small budget surplus.

      When “W” took office there was a mild recession and small budget surplus.

      He cut taxes a lot.

      “W” left the U.S. economy sliding off a board in free fall to the bottom of the ocean.

      There were almost no private sector jobs created in 8 years under “W” and the net increase wasn’t enough to keep up with illegal immigration.

      “W” couldn’t have done it worse if he were picked by the Taliban!


      • Commentator says:

        Well Kevin Rica,

        You’ve selected some data points that amount to very little of significance in my opinion.

        The Clinton-Gingrich years (they shared steerage of the economy) were basically the Reagan years continued. Clinton barely raised taxes from the Reagan levels. What happenend was the supply-siders were proven right. They cut taxes, growth-in-abundance occurred, increased income lead to increased taxes, and the budget shrunk (note, I don’t argue short-term tax cuts increase tax revenues for that is absurd); but properly done, it can medium and long term; it’s impossible to prove because the counter-factual does not exist in reality).

        Obama has done for the USA what the same Urban-Democrats have done to Detroit … it’s taking the taxpayers money, giving it to cronies, and all under the masquerade of helping the destitute.

        Obama has broken all his campaign commitments. He’s copied W.’s foreign policy exactly.

        We’ll see.


        • Kevin Rica says:

          Commentator,

          “Clinton barely raised taxes from the Reagan levels.”

          And the deficit went down.

          And W made a big tax cut and the deficit went up.

          And when Obama took office — you needed sonar just to find the economy which was sliding off a board into free fall to the bottom of the ocean.

          And no matter what Obama did — W nearly destroyed the economy.

          These things don’t mean much to you because your logic is consistent. It follows immediately from your conclusions.

          And after all those years of Reagan’s tax cuts, for that matter, the deficit was huge!


      • Bobloblaw says:

        “”Whatever else Obama has done, he left Bin Laden sliding off a board in free fall to the bottom of the ocean.”"

        And Churchill won WW2 for the British and they kicked him out of office before the war even ended once victory was insight. So your point is a historical nonsequitor. Voters dont vote for the future based on some foreign policy success in the past.

        As for Clinton, want to know why the economy boomed. Its this simple. Federal spending as a % of GDP fell from 22% in 1993 to 18% by 2000. That’s over $400b per year worth of capital in 2000 that was freed up for the private sector that the govt was sucking up. The economy stagnates when govt spending rise as a % of GDP and booms when it falls.

        Under GW Bush spending rose from 18% of GDP to 22% of GDP erasing all of Clinton’s real reductions. Obama has pushed it further to 26% of GDP a peacetime record. No surprise then that since 2001, there has been no job growth and an average of only 1.7% GDP growth. Combined with ultra low interest rates, there was a debt bubble created to keep the illusion of prosperity going.

        Put aside the partisan garbage. Reagan and Clinton had more with one another and GW Bush and Obama have more incommon with one another on the issue of economics.


  6. MRW says:

    Jared, you need to show real wages (hourly, weekly) since 1970.

    The discussion you are hoping to get in this country will not happen without a clear understanding of the last 40 years, especially those years which envelope the vaunted Reagan years.

    That chart will shock you.


  7. Muhammad W says:

    I have a technical question about this data. From the text, it seems like you are taking the average over only people who *have a job*. Is this correct, or is it an average over everyone?

    If the average is restricted to those who have a job, did you make any effort to ensure a stable cohort? I am worried that you are seeing changes in volume rather changes in the values. For instance, if the economy added low-paying jobs while wages for existing jobs remained stable, then the average would decrease even though everyone was better off.

    http://en.wikipedia.org/wiki/Simpson's_paradox


    • Jared Bernstein says:

      Good question. As noted in the post, these data are for all workers, so yes, the composition of the workforce could change over time in ways that affect the measure, but that’s actually unlikely over relatively short periods like this. And the growth in the average or median wage of all workers is still a relevant measure of what’s going on in the job market.

      The BLS does have a series called the Employment Cost Index that does a better job of controlling for the cohort issue–it shows pretty much the same thing as the series I posted once you adjust for inflation.


      • Muhammad W says:

        Thanks for the link to the ECI. From the docs, it looks like that does the appropriate weighting. Helps me sleep more soundly at night :-) .

        As a non-economist, I am a bit surprised that changes in employment don’t have a bigger impact on your metric. I would have expected big effects as we were going into and out of the recession.


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