Quantcast
Connect with us

Real wages are stronger than you think — so why aren’t we feeling it?

Published

on

Last month’s US employment report, released on Friday, contained a lot of good news.

First, monthly jobs growth exceeded expectations, as employers hired 280,000 people. Second, the labor force participation rate ticked up, indicating that people who had stopped looking for work were becoming more optimistic about finding a job and thus had resumed their search for one.

ADVERTISEMENT

Finally, average hourly earnings for all production and non-supervisory workers in the private sector grew by 2%, compared with May 2014.

Some people may question why wage growth of 2% would be considered good news. The reason is there was no rise in prices over that period, so the average real wage also grew by about 2%. And it is the real wage, rather than nominal pay without accounting for inflation, that ultimately determines the living standards of the American worker.

While the first two highlights from the jobs report are indeed good news, this last one might be its most important takeaway – though it’s been true for a few months now. We’ve been reading articles for years about how stagnant wages have been without focusing on the impact of the lack of inflation. In other words, while we’re not making a lot more money, it should feel like more because consumer prices have barely budged since the financial crisis – by that measure, wages for most workers are the highest they’ve been in decades.

This matters because it suggests the economy is in better shape than we think and may be what the Federal Reserve has in mind as it considers raising rates this year, with many (including the International Monetary Fund) urging the central bank to wait until 2016.

One of the biggest risks, however, concerns productivity, which is truly stagnant. That and take-home pay are highly correlated, so if productivity doesn’t pick up, the rise in real wages may well evaporate.

ADVERTISEMENT

The real wage story

The consumer price inflation data for May will not be released until later this month, so the balance of this essay will focus on the real wage rate in the private sector through April – although I would not expect the story to change once we can evaluate the latest data. (Hourly wage data for government workers are not available.)

I would also like to focus on the economic prospects of middle- and lower-income workers, so I will be looking at the earnings of those in production and non-supervisory roles. This group accounts for 82% of all private sector workers, who on average earned US$20.91 an hour in April.

The average hourly real wage for this group since 2007 is shown below (converted to April 2015 dollars). The shape of this graph undoubtedly will surprise many readers given the widely held believe that the middle class has been falling behind economically.

ADVERTISEMENT

Real wages are now the highest since 1979.
Bureau of Labor Statistics

 

ADVERTISEMENT

The average hourly real wage did decline during the “Great Recession” and again in 2011 and 2012, but since falling to its recent low of $20.17 in October 2012 it has increased, first at a modest pace and then more rapidly since September as price inflation disappeared.

Perhaps even more surprising for most people is that the average real wage for these employees is now at the highest level since March 1979, although it is still 8.2% below the all-time peak ($22.27) reached in January 1973.

The average real wage for middle-class workers declined during the second half of the 1970s, the 1980s and the first half of the 1990s, reaching a low of $17.97 in April 1995 (data go back to 1964). Since then, wages have tended to slowly increase, with the largest gains when price inflation disappears and the greatest losses occurring when it spikes upward.

ADVERTISEMENT

Widespread gains

That brings us back to the most recent figures. During the 12 months through April, average hourly real earnings for production and non-supervisory workers increased by 2%. These wage gains are fairly widespread among industries, as is shown in this table.

Real wages are up across the board over the past year through April.
Bureau of Labor Statistics

 

Moreover, the greatest wage gains occurred in some of the lowest-wage industries: in retail trade (up 2.3%), accommodations (4.6%), full-service restaurants (4.7%) and fast food restaurants (3.7%). Clearly some of the lowest-paid workers in America have enjoyed some very substantial real wage gains during the past year.

ADVERTISEMENT

Real wage gains have also far outstripped productivity gains. From the first quarter of 2014 to the first quarter of this year (most recent data), labor productivity in the non-farm business sector increased by only 0.3%, compared with real wage growth of 1.9% for private sector production and non-supervisory workers over the same period.

The poor rate of productivity growth has been a feature of the current economic recovery. Over the past five years, from the first quarter of 2010 to the first quarter of 2015, output per labor hour has increased by only 2.8%, or 0.6% per year. Over the long run, productivity growth puts a cap on the maximum rate of growth in the real hourly wage rate – meaning if productivity doesn’t start rising, neither will wages.

Why real wage growth is poorly understood

So why are people so convinced that middle- and low-wage workers have been losing ground?

Many people point to the fact that the real hourly wage is less than it was in 1973, but that reflects the decline that occurred between 1973 and 1995. Since then, the average hourly wages have been on a slow upward trend, averaging 0.76% per year – not much, but positive all the same. And as I’ve shown, those gains accelerated in the past year year, with even larger ones in lower-wage industries.

ADVERTISEMENT

Perhaps the recent wage gains have yet to sink into people’s consciousness, and thus their assessment of the economy will shortly improve. Also, millions of people are still unemployed or have dropped out of the labor force, and their income has not benefited from the increase in average wages.

Or perhaps people are unhappy because they are comparing their financial situation with higher-income households, who have done even better, although income inequality is only slightly worse than it was in 2000, when the middle class seemed much happier (see the excellent work of Berkeley’s Emmanuel Saez).

Or maybe it’s something as simple as our spending desires outpacing the growth in the real wage rate. People clearly were spending a lot of borrowed money through 2007, when the financial crisis sharply curtailed many people’s ability to borrow and spend.

What I do know, however, is that unless productivity growth improves, the real wage gains that the data show will prove fleeting. And then we really will be in a world of hurt.

The Conversation

ADVERTISEMENT

By Donald R Grimes, University of Michigan

Donald R Grimes is Senior Research Associate, Institute for Research on Labor, Employment and the Economy at University of Michigan.

This article was originally published on The Conversation.
Read the original article.


Report typos and corrections to: [email protected].
READ COMMENTS - JOIN THE DISCUSSION
Continue Reading

CNN

White House lawyers were desperate not to talk about Rudy Giuliani — or Trump’s other conspiracy theories: CNN analyst

Published

on

On Saturday, CNN analyst Gloria Borger noted a key piece of the timeline that was conveniently missing from the defense presented by President Donald Trump's legal team: The involvement of Trump's private lawyer Rudy Giuliani.

"The one person that Jay Sekulow didn't mention is Rudy Giuliani, because this is Rudy Giuliani's theory of the game here," said Borger. "They were very careful not to bring up Rudy Giuliani because they know that he is not well regarded in the United States Senate, but if you again look at this summary of the transcript of the president's phone call, the president talks about CrowdStrike, he talks about a lot of things that went on. 'I would like to have the attorney general call you or your people, I would like to have you get to the bottom of it,' this whole nonsense, he talked about Bob Mueller and said a lot of it started with Ukraine."

Continue Reading

Breaking Banner

Pompeo ridiculed by CNN panel for his ‘phony mock outrage’ response after being outed as a foul-mouthed bully

Published

on

Responding to a statement from Secretary of State Mike Pompeo issued through the State Department accusing an NPR journalist of being "shameless" for going public with an encounter she had with him in his offices where he cursed at her, a CNN panel all but rolled their eyes at his "phony" outrage.

Speaking with host Anderson Cooper, CNN legal analyst Jeffrey Toobin called out the blustery Pompeo as well as many Republicans who took "umbrage" at Rep. Adam Schiff (D-CA) mentioning a report that the Donald Trump would have their heads on "on a pike" if they crossed him.

Continue Reading
 

Facebook

Trump attorney Sekulow’s impeachment defense of president blown out of the water with Lindsey Graham statement

Published

on

On Saturday, one of the biggest opening arguments made by President Donald Trump's legal team at the impeachment trial was that there was, in fact, a risk that Ukraine had meddled in U.S. elections.

"Mr. Schiff and his colleagues repeatedly told you that the intelligence community assessment that Russia was acting alone, responsible for the election interference, implying this somehow debunked the idea there might be in — you know, interference from other countries, including Ukraine," said Trump counsel Jay Sekulow. "This is basically what we call a straw man argument."

But MSNBC's Brian Williams knocked down this defense with a clip from none other than one of President Donald Trump's biggest allies: Sen. Lindsey Graham (R-SC).

Continue Reading
 
 
Help Raw Story Uncover Injustice. Join Raw Story Investigates for $1 and go ad-free.
close-image