Rising Real Wages?

On the Liberty and Power blog, economist Robert Higgs notes:

According to the Bureau of Labor Statistics, the average
hourly earnings of workers in all private industries rose from $17.23 in
March 2007 (when the rate of unemployment was 4.4 percent) to $18.59 in July
2009 (when the rate of unemployment was 9.4 percent). During this same period,
the consumer price index for all urban consumers rose by about 5 percent. Using this index to adjust the earnings data, we find that real hourly earnings rose by 2.8
percent during this 28-month period of deepening recession.

On an empirical note, the headline CPI increased 7% between March of 2007 and July of 2008. That is about 5% annual inflation. It then dropped 4.6% between July and December of 2008, which is a 10% annual rate of deflation. It has since that time risen about 2.5%, which is a 4% annual rate of inflation..

On a theoretical note, there were several macroeconomic events going on during the period. First, there was a shift from demand for single family houses to other goods. That process involves structural unemployment. While the adjustment process could be aided by higher prices and lower money wages (or at least slower nominal wage growth,) in the end, this is about changes in relative prices, the composition of output, and the allocation of labor. The adjustment could occur without any change in the growth path of real wages.

While this reallocation has been continuing, a secondary crisis was superimposed upon it starting a year ago. There was an increase in the demand for money, resulting in falling nominal expenditure. Just about every category of private expenditure dropped in the third quarter of 2008 and the first quarter of 2009.

An increase in the demand for money requires either a matching increase in the nominal quantity of money or lower prices. While that includes the prices of resources, such as labor, no change in real wages is needed. If some prices are more sticky than others, then the relative prices of more sticky prices will rise and the less sticky prices fall. If wages are especially sticky, then real wages would rise. Still, it isn't really the problem.

While some of the deflation in the headline CPI occurred when nominal expenditure was dropping, nominal income continued to drop in the first part of 2009, and headline CPI began to rise. In the second quarter of 2009, nominal expenditure stabilized. While nominal GDP fell a bit, total final sales actually increased. Still, total expenditure was about 5% below its long run growth path. For real expenditure to recover, prices and wages should fall. (Or, of course, nominal expenditure could rise.)

Most importantly, there was a huge run up in oil prices in the summer of 2008 that was reversed in the fall. That was the source of much of the change in the headline CPI. The higher oil prices should lower real wages. When oil prices come back down, real wages should rise again.

While Higgs focused solely on two end points, March 2007 and July of 2009, what has happen to this measure of wages? The trend growth rate of nominal wages has been about 3.6% per year between August 2004 and August 2008, with monthly wages deviating less than 1% from the trend growth rate. Currently, nominal wages are .75% below trend. As nominal income dropped in late 2008, nominal wages grew faster than trend (close to 4%) and reached a peak deviation of .33% above trend. The growth rate then slowed in early 2009, and soon nominal wages fell below trend.

Real wages, on the other hand, using the headline CPI deflator, have had a rougher ride. The trend growth rate is .84%. Real wages were nearly 3% below trend in July of 2008, and then nearly 3% above trend in December. Why? The change in oil prices and the resulting change in the headline CPI. Real wages remained nearly 1% above trend in July of 2009, however, the growth rate of real wages has been negative every month in 2009 until July. There was a a remarkable 9% annual rate of decrease in June of 2009. In July, real wages rose at a 5% annual rate.