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Real Wages and May Inflation

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Wednesday, 18 June 2014 04:37

In the NYT's Upshot section Neil Irwin correctly notes that real wages have been nearly stagnant in the recovery, however he makes too much of the inflation numbers from the last couple of months. The Bureau of Labor Statistics reported that inflation rose 0.3 percent in April and 0.4 percent in May. These increases were enough to wipe out modest real wage gains reported in prior months so that the average hourly wage has now fallen slightly over the last year, adjusted for inflation.

While this is bad news, it is wrong to make too much of the drops reported for April and May, as opposed to the modest growth reported in prior months. The higher inflation reported for April and May were largely attributable to unusually large price increases for food and energy. These prices are highly erratic and are likely to be reversed in the months ahead. (Food prices rose at close to a 6.0 percent annual rate over the last two months, compared to a 2.5 percent rate over the last year. Energy prices rose at more than a 7.0 percent rate compared to a 3.3 percent rate over the prior 12 months.)

If these price rises are reversed in the months ahead, which is likely, then we will be back on the path of very weak real wage growth. It will still be the case that workers are seeing very little of the benefit from the recovery, but the number will not be zero.

Comments (9)Add Comment
...
written by Squeezed Turnip, June 18, 2014 7:45
It sure feels like zero.
In the real world, wages are dropping
written by Ellis, June 18, 2014 10:26
Wages are dropping and not stagnating or rising, as economists claim. I don't know how you guys get your numbers, but there are less full time jobs that pay benefits. More jobs are either part time, temporary or whatever. And those people with benefits are paying more for them. For example, the premiums for employers' health insurance have more than quadrupled over the last 15 years. That's a pay cut that doesn't show up in the official statistics.

Economists should stop apologizing and hiding the assault on wages. "We're winning the class war," said Warren Buffett. That's the reality, as opposed to the pontifications of official economics.
Yellen/Akerlof model at work :)
written by pete, June 18, 2014 10:43
What is the whining about, this is the standard economic model. Unemployment is high because wages are high, i.e., the standard assumption in the Yellen-Akerlof model. Thus, to get a recovery, real wages must fall. Firms must be able to sell products at prices which increase faster than the wages they must pay. Only then will they increase hiring. The current modest inflation is almost enough to get employment back up, with stagnant nominal wages, but clearly not enough. Krugman and many others want more inflation to get the job (falling real wages) done quicker. Even Jared admitted this was "unfortunately" true in the NYT article about Yellen several months ago.
The real whiners
written by John Parks, June 18, 2014 8:16
Pete
Yes, there is some real whining going on but it is coming from that segment of society that we would call the predatory capitalists. They are very pissed that slavery was abolished and are doing their best to minimize their losses.

...
written by kay, June 18, 2014 8:35
It is absurd to claim that food prices will be coming down in the future. There is perennial drought in California, the bread basket of the U.S. & this is likely to get worse in the future; Heard of Global Warming! Food prices are not coming down. This is the nonsense "Economics" of Arthur Burns, the father of Core-CPI. Prices of vegetables and fruit, eg, strawberries, blueberries, cantaloupes, organic rice, meat etc. have gone up about 60% from mid-season 2013 to 2014. I used to buy organic basmati rice for $1.99/lb. in 2013 at WF: now it is $2.99/lb. Similar changes have taken place for fish (Salmon has gone through the roof).

Oil prices are likely to stay high because of the oligopolistic situation fostered by US government. Electric batteries are not likely to make much of dent for some time. Rents are getting sky high, the price of medical care is getting higher, thank you Mr. Obama for not pushing Medicare for all.

Dean Baker, why are you falling in this stupid trap?

Sorry to hear about Gabriel Kolko's demise.
What It Is
written by Larry Signor, June 18, 2014 9:38
Very weak wage growth is just that, weak wage growth. This will not cure overhanging debt or inspire demand in the near future. The "cramdown" is happening to labor which will slow any recovery or return to growth trend. Even good economists are ahead of the economic reality. We ain't even close to healed.
...
written by Vedicculture, June 19, 2014 2:55
There is not much overhanging debt left. Real wages have been "weak" since 1983. This is nothing new.

Demand isn't wage driven anymore either. It is credit access.

People don't get how the economy has changed over the last 30 years.
...
written by liberal, June 19, 2014 8:46
pete blithered,
Unemployment is high because wages are high, i.e., the standard assumption in the Yellen-Akerlof model.


Just like it's a standard assumption that if a country runs a trade deficit, its currency will devalue until the deficit appears.
@ Vedicculture
written by Larry Signor, June 19, 2014 10:29
Not much overhanging debt left? http://research.stlouisfed.org...s/TOTALSL/

Sure doesn't look benign.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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