What Little Real Wage Gains We’ve Seen Are the Result of Dis-Inflation

February 7th, 2014 at 2:18 pm

In an earlier look at today’s jobs report, I pointed out that wages are growing a bit faster than inflation, and then made the following assertion:

These real gains are more a function of weak demand, and thus low inflation, than they are indicative of a strengthening job market.

Let me substantiate that with a touch of number crunching.

The table below shows percent changes in the real weekly earnings of blue-collar, non-managers (i.e., mid-wage workers) in column 1.  The other columns break the growth down into nominal hourly wages, weekly hours, and inflation.  I’ve set this up so col(1)=col(2)+col(3)-col(4), or the growth in nominal wages plus weekly hours minus inflation equals the growth in real weekly earnings.


Source: BLS

As you see, real weekly earnings for these workers flipped from slightly negative— -0.6%, year over year—a few years ago to slightly positive this year (in dollars, they were about $680 last month).  The swing, or acceleration, shown in the last row, amounts to 1.2%–not great but a move in the right direction.

However, the other changes show that by far, the largest factor driving the acceleration in real earnings was the fall in the rate of inflation from 3.1% to 1.4%, a sharp deceleration.  Weekly hours of work actually went the wrong way, reducing the growth of weekly earnings.  Nominal wage growth accelerated a touch, by half-a-percent, but had it not been for falling inflation, real weekly earnings would have fallen faster last year than a few years ago, as hours losses were greater than nominal hourly wage gains.

So, while we’re all happy to see even a little bit of real earnings gains, they certainly don’t have much to do with faster demand, which would typically juice hours and prices a bit more.  Workers need to pin their hopes on more than dis-inflation to see their paychecks grow faster.

Data Note: All data are three month averages over Nov, Dec, and Jan (e.g., the 2014 average hourly wage was averaged over Nov and Dec of 2013 and Jan of 2014) on production, non-supervisory workers.  I estimated the CPI in Jan 2014 based on the average yearly change over the past six months.  Percent changes are in natural logs to facilitate the decomposition.

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3 comments in reply to "What Little Real Wage Gains We’ve Seen Are the Result of Dis-Inflation"

  1. smith says:

    More information please.
    How many workers of the 120 million full time workers are included?
    (This a very hard figure to come by, I know because I looked. BLS shows rates and increases but not actual numbers. I was looking for exempt vs non-exempt employees which depends on size of business too. Why is this so hard to find?)
    What is the wage of the mid-wage worker?
    (easily available I think)

    Also if the distribution of wages is anything like the distribution of all income for everyone, then mid-wage (assuming it means median not average) gives a highly distorted view. That’s because income is heavily skewed towards the lower end. Example: 5 people make $3/hr, 1 person $5/hour, 2 make $6/hour, 1 make $8/hour, 1 person makes $40/hour. The distortion is thinking the mid-wage $5/hour represents a common wage when half (5 people out of 10) are actually making $3/hour, and that .5% raise $250 for $50,000/year probably means 0 for those below and a 1% raise for those above.

    Missing also is a call for new taxes on the rich to fund a stimulus directed at infrastructure, research and development, and education, and cutting the free hours salaried employees are required to work.

  2. PeonInChief says:

    The measure of inflation has been worthless-well not worthless, but less than useful–for the poorest 80% since the Reagan Administration reworked it in 1982. It doesn’t properly account for housing costs, and leaves out the “volatile” food and energy sectors entirely, even though those are the consumer goods that most of us spend most of our money on. Rents, for instance, have increased more than 10% over the last year in many states, which means that any savings in, say, clothing costs, are more than offset by the cost of housing.

    • Larry Signor says:

      The CPI is low hanging fruit for criticism. It is clearly a macro indicator just as employment data is. Micro situations are woven into whole policy clothe in these tools. I wouldn’t expect the BLS report to be specifically applicable to my employment situation. CPI is in the same category. Jareds point still stands, we have experienced a slight increase in “buying power” due to a decrease in inflation. Just what we would expect.