Sunday, February 7, 2010

Wages: Nominal and Real in the Great Recession

Nominal expenditures have fallen approximately 10 percent below the 5 percent growth path of the Great Moderation. What has happened to nominal wages? What has happened to real wages?

One measure of nominal wages is the Bureau of Labor Statistics series average hourly earnings for total private industries. At the beginning of the Great Moderation in 1984, this measure of wages was $8.38 per hour. When the recession began in December of 2007, wages were $17.71. In December 2009, this measure had reached an all time high of $18.80.



Since the beginning of the Great Recession, nominal wages have increased by $1.09, approximately 6 percent. The wage rate consistent with that trend in December 2009 is $18.74. After two years of recession, nominal wages are about 6 cents, or .3 percent, greater than trend.


The trend growth rate of hourly average wages during the Great Moderation was approximately 3%.


The growth rate of wages during the Great Recession was also 3 percent. However, it is obvious from the diagram that wages were growing faster than 3 percent going into the Great Recession.


Only when nominal expenditure began falling in the fourth quarter of 2008 and then into the first quarter of 2009 did nominal wage growth begin to slow. In April of 2009, this measure of nominal wages stopped rising.
What about real wages? To calculate real wages, it is necessary to choose a price index to deflate nominal wages. The first series of real wages is calculated using the monthly Personal Consumption Expenditures deflator.
The trend growth rate of this measure of real wages is .7 percent and it is currently at an all time high of $17.03 in 1985 dollars. When the recession began in December 2007, it was $16.48, so the increase over the recession is approximately 55 cents or 3.3 percent.


The most obvious characteristic of the measure of real wages over the period of the Great Recession is the sharp jump from $16.50 in September 2008 to $17.05 in December. That 53 cent increase is 3.2 percent, nearly the entire increase in real wages during the Great Recession.
Further, there were some decreases in real wages during the Great Recession, most notably the 10 cent decrease, nearly 1/2 of a percent between June and August of 2008. There is also the 8 cent, 1/2 of a percent, drop between May and June of 2009. Still, a large sudden increase is by far the best way to characterize this measure of real wages.




The sharp increase in real wages during the Great Recession is remarkable compared to the Great Moderation.
Why did the growth rate of real wages change so much? Both the large spike in real wages and the significant drops in real wages were due to changes in the inflation rate.
Perhaps a better estimate of the real wage can be found by using a measure of "core" inflation, such as the Personal Consumption Expenditure deflator without food and energy.



The basic pattern is similar to real wages calculated with all prices, including food and energy, but there is no large jumps during the Great Recession.



While there is some variation in the real wage, it is well above trend, and has continued to grow. At the beginning of the Great Recession, in December 2007, it was $16.71 (in 2005 dollars.) In December of 2009, it was $17.18. The increase during the period of the recession was slightly less than with the first measure, 2.8 percent.




The trend growth rate of real wages for the Great Moderation is approximately the same, .7 percent, as with the more inclusive measure of the price level. The following diagram focuses in on the Great Recession.


While there are sharp changes in the growth rate, particularly, the decrease in April 2009. This was after two quarters of large decreases in nominal expenditure and real output. Nominal wages didn't fall, however, they simply didn't rise. The reason for the large decrease in real wages can be seen with the "core" inflation measure.
While nominal wages didn't rise in April of 2009, the decrease in real wages was due to a short-lived spike in core inflation.


Nominal expenditures are approximately 10 percent below their trend from the Great Moderation. Nominal wages are approximately .3 percent above their trend from the Great Moderation. Real wages, using the "core" inflation measure are approximately 3.7 percent above their trend from the Great Moderation.

3 comments:

  1. Let me explain the basic principle how most Forex systems work. They are tuned up to work in a specific market condition. They often make money in a trending market, but loose money in a choppy market. It is not a problem as long as the market is trending and the system is making more money than it loses. Such a system can be profitable for several months and you would be happy with it. BUT...

    PREPARE FOR THE WORST...

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  2. Let me explain the basic principle how most Forex systems work. They are tuned up to work in a specific market condition. They often make money in a trending market, but loose money in a choppy market. It is not a problem as long as the market is trending and the system is making more money than it loses. Such a system can be profitable for several months and you would be happy with it. BUT...

    PREPARE FOR THE WORST...

    Market change over time. A well designed system starts with trend analysis to stay away from potentially losing trades. There are two problems of how a Forex system recognizes the trend.

    PROBLEM: FALSE "STRONG TREND" INDICATION.

    The system responds only to immediate price action. An explosive price movement that is usually the result of news release is tempting people to jump in and make a profit. It looks like a "strong trend", but what usually happens next is a hard fall.

    To avoid falling into this trap, check for the SOLUTION to find a REAL trend:

    http://www.forextrendy.com?nsjjd92834

    SECOND PROBLEM: TREND RELIABILITY

    Most systems use various indicators to determine the trend. Actually, there is nothing bad about using indicators. One Simply Moving Average can do the job. The problem comes with the question: "Is the market trending NOW?" Whether the market is trending or not trending is not like black and white. The correct question is: "How well the market is trending?"

    And here we have something called TREND RELIABILITY.

    Trends exist and they can be traded up and down for a profit. You have to focus only on the most reliable market trends. "Forex Trendy" is a software solution to find the BEST trending currency pairs, time frames and compute the trend reliability for each Forex chart:

    http://www.forextrendy.com?nsjjd92834

    ReplyDelete
  3. Let me explain the basic principle how most Forex systems work. They are tuned up to work in a specific market condition. They often make money in a trending market, but loose money in a choppy market. It is not a problem as long as the market is trending and the system is making more money than it loses. Such a system can be profitable for several months and you would be happy with it. BUT...
    PREPARE FOR THE WORST...
    Market change over time. A well designed system starts with trend analysis to stay away from potentially losing trades. There are two problems of how a Forex system recognizes the trend.
    PROBLEM: FALSE "STRONG TREND" INDICATION.
    The system responds only to immediate price action. An explosive price movement that is usually the result of news release is tempting people to jump in and make a profit. It looks like a "strong trend", but what usually happens next is a hard fall.
    To avoid falling into this trap, check for the SOLUTION to find a REAL trend:
    ==> http://www.forextrendy.com?nsjjd92834
    SECOND PROBLEM: TREND RELIABILITY
    Most systems use various indicators to determine the trend. Actually, there is nothing bad about using indicators. One Simply Moving Average can do the job. The problem comes with the question: "Is the market trending NOW?" Whether the market is trending or not trending is not like black and white. The correct question is: "How well the market is trending?"
    And here we have something called TREND RELIABILITY.
    Trends exist and they can be traded up and down for a profit. You have to focus only on the most reliable market trends. "Forex Trendy" is a software solution to find the BEST trending currency pairs, time frames and compute the trend reliability for each Forex chart:
    ==> http://www.forextrendy.com?nsjjd92834

    ReplyDelete