Slower Wage Growth Collides with Faster Price Growth

August 18th, 2011 at 11:33 pm

When unemployment is as high as its been (and likely to stay up there for a while), nominal wages tend to grow more slowly.  Back in early 2009, the annual growth rate of hourly wages was about 3.5%; now it’s down to around 2%.

At the same time, inflation has picked up—we learned today that consumer prices grew 3.6% over the past 12 months (energy prices spiked and food prices grew more quickly as well—take those out and the price index grew less than 2%).

Combine slower nominal wage growth with faster inflation and you get the picture below.  It plots both the real (inflation-adjusted) growth in hourly and weekly wages over the past few years.  Inflation was running close to 1% around a year ago, and that led to growing real wages.  But the collision of faster price growth and slower wage growth since then has meant a decline in the buying power of the average workers’ paycheck.

Source: BLS

Weekly earnings have fallen less as increased hours per week have helped to offset some of the slowdown in real hourly wages.  But not enough to avoid real losses.

I know…I know…some of us have argued for faster inflation to help further reduce real interest rates as well as the real debt burdens of deleveraging households.  But I mentioned this very problem—real wage decline—in that context.  And the idea there is to hasten faster growth and put this damn “growth recession” behind us, get people back to work, and get nominal wages rising more quickly.


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6 comments in reply to "Slower Wage Growth Collides with Faster Price Growth"

  1. roseonpolitics says:

    So people are working harder, longer, and getting paid less. And they would probably still consider themselves lucky to have jobs.

  2. pjr says:

    How you achieve the goal of slightly higher inflation matters. Wage growth would be inflationary but would be quite helpful in generating demand. Are we overdue for an increase in the minimum wage?

  3. foosion says:

    The idea of the Fed inducing higher inflation would be to improve the economy and therefore lead to faster real wage growth. As unemployment falls, employees have more bargaining power and can command higher wages.

  4. DJ Tran says:

    The two real wage series in the chart appear to have been derived by deflating nominal wages by the consumer price index. As such they measure real wages as income (purchasing power)of workers.
    Do you have data on real wages defined as nominal wages deflated by the GDP deflator (or non-farm GDP deflator), which is an overall producer price index?
    These latter data measure real wages as costs to producers and are a more reliable indicator of the profitability (or otherwise) of employing more workers.
    Thank you.

  5. Anon says:

    This is the fundamental problem with how the Fed and fiscal authorities are treating the problem. They know that we need inflation, but the only way to have newly printed money (aka inflation) pass through to debtors is to give it to them directly. The transmission mechanism from the banks to people is completely dysfunctional – debtors with bad credit scores can’t borrow money and businesses without customers don’t want to. So the money either sits in treasuries (10 yr @ 1.97% LOL), or is loaned to hedge funds to speculate in commodities.

    Just print 6T and give every man, woman, and child 20k and be done with it. Attempting to generate inflation the way we are now is making the debt overhang worse in the real world.

  6. general c. san desist says:

    By forming a consumer group based on consumption, energy, the individual can make money and provide power for the larger business & industrial community. Let’s call this group the Citizens Utility Cooperative. Through local financing, voter approved bonds can empower the private home owner to be part of a massive & all-inclusive provider-based smart grid by having locally manufactured wind & solar generators providing efficient, clean local energy. During the day energy flows to the grid, making money for the individual provider, not some corporation drilling at depths of 5000 feet. At night, we can tap back into the grid to get a return on our investment.

    The unemployment problem stemmed from a few states, Arizona, California, Florida & Nevada when the housing build out credit fueled Wall Street Musical Chair Credit Theory suffered an embarrassing chair shortage. This snowballed to other regions and industries, like berries through a goose. These States should be the forefront of the assault on the problem…the rest will follow naturally. Said states are also naturally suited for renewable energy generation. This is where the focus of all our resources should be. Keeping it where the meltdown happened removes the need for population migration & further attrition to the local communities.

    Requiring, through local legislation, that power provided for the business & industrial needs be purchased from the co-op, there will be no longer a need for foreign sources of energy. By keeping the wpa-type project local, meaning that excess capacity (idle factories) & excess capital (labor) are based on the local infrastructures ability to retrofit existing factories, railway/waterway accessible preferred. Towns along most of the major rivers in California have facilities just waiting for this moment and lord knows we have the sand, so to speak. The trick is conversion to mono or poly silicon. Research is needed to get a handle on costs.

    You need four major manufacturing components: wind turbine, solar panel, solar roof tile & inverters. The internet can provide the best organization of resources at the most efficient return. Imagine the employment building out the infrastructure, full as far as the eye can see. Patents will be a problem, I can see now, as greed is in play. Apparently, the word “share” is not part of Business School-speak. Must be a generational thing…go figure.
    The beauty of this plan are the consequences on fossil fuel consumption & price supports. In order to compete, oil would have to plunge in price, making it no longer feasible to pull from the ground, save for military readiness…game, set & match. There will have to be tariff protected industries here in the States to guard against Chinese poaching through their governments targeted approach in skewing the competitive market by monetary manipulation. I believe the Chinese already own quite a large share of the panel market.

    One caveat concerning organization & labor…these are cooperative-owned projects using limited revenue resources through public financing. There will be no room for union wage scales in such a massive effort. Take a look at the Bay Bridge construction at the moment, we are buying foreign steel to support union labor here. The unemployed, I would venture, are willing to make a comfortable living wage & not demand two suv’s in the driveway , a boat and a McMansion in the suburbs.

    Think of the savings in not having a military patrolling the world to protect corporate interests or foreign sheiks who suppress their population. There is one big caveat in this. The U.S., British & other intelligence community better have a pretty good plan to destabilize all third world nuclear countries & snatch their weapons…without such, were are all screwed anyway, so why bother. I’ve noticed lately that said third world countries in the southeast Asian rim are actively seeking submarines, why? The better question is how can this be legal, selling war ships to dictators, potentates, Russian oligarchs & just plain nasty riffraff.

    Seems “look, Squirrel” has taken the focus off our real situation…jobs, price of food & energy, jobs, housing, jobs…did I mention jobs?