Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
VR and Gaming Becomes the Metaverse - 7th Dec 21
How to Read Your Smart Meter - Economy 7, Day and Night Rate Readings SMETS2 EDF - 7th Dec 21
For Profit or for Loss: 4 Tips for Selling ASX Shares - 7th Dec 21
INTEL Bargain Teck Stocks Trading at 15.5% Discount Sale - 7th Dec 21
US Bonds Yield Curve is not currently an inflationist’s friend - 7th Dec 21
Omicron COVID Variant-Possible Strong Stock Market INDU & TRAN Rally - 7th Dec 21
The New Tech That Could Take Tesla To $2 Trillion - 7th Dec 21
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Real Wage Growth Is Actually Falling

Economics / Wages Sep 27, 2018 - 05:44 PM GMT

By: Patrick_Watson

Economics The US economy is at “full employment,” says the official 3.9% unemployment rate.

The problem is that fully employed people haven’t seen enough wage growth. It’s a puzzle. Wages used to rise faster when unemployment was this low.

That’s why there was much celebration when the August jobs report showed a 2.8% annual increase in average hourly earnings for “Production and Nonsupervisory Employees,” i.e., regular workers.


The media reported it was the fastest wage growth since 2009.

That was correct in a narrow, technical sense. But not in real life.

Real Wages Are Flat

Aside from employment data, the Bureau of Labor Statistics also compiles the Consumer Price Index (CPI), our primary inflation gauge.

In the same period in which average hourly earnings rose 2.8%, the CPI rose 2.7%. That’s how much the cost of living went up, on average.

(Your personal inflation depends on how you spent your money. But unless you had no housing or transportation expenses in the last year, your cost of living probably rose at least 2.7%, and possibly much more.)

So, a 2.8% wage gain is essentially no gain at all. Inflation-adjusted wages are flat since last year. It is certainly not the fastest wage growth since 2009, or even close.

But that’s not what you read in the news. They showed you charts like this one, which doesn’t adjust for inflation.



Source: Bureau of Labor Statistics, St. Louis Federal Reserve Bank

In this chart, wage growth started a nice rally in mid-2017. And apparently, it is set to go higher still. But again, that doesn’t consider inflation.

Here is the very same data series for the same time period, but subtracting CPI-U inflation.



Source: Bureau of Labor Statistics, St. Louis Federal Reserve Bank

Quite a different picture.

We see that real wage growth peaked in 2015. Since then, it’s been trending down, except for a brief pop in 2017. And it’s been about zero in recent months.

Economists and journalists know about inflation. They often report Gross Domestic Product growth in real terms, for instance. But not wage growth. For that, they assume inflation doesn’t matter.

But it matters a lot. Workers whose earnings don’t keep up with inflation find themselves falling behind. Eventually, they notice the problem and look for someone to blame. Hence, our current social and political discord.

Memories of 1980

One more chart. This is average hourly earnings minus CPI-U—same as the sad-face chart above—but this time going back to 1965.



Source: Bureau of Labor Statistics, St. Louis Federal Reserve Bank

When the blue line is below zero—as it was for long periods—real wages were actually dropping instead of growing. 

On the positive side, there were a couple of times when real annual wage growth approached 5%. But only a couple, and they didn’t last long.

Notice that big spike down in 1980, by the way. That was the recession year when angry voters ushered out Jimmy Carter.

Thankfully, we are nowhere near that point now. But neither are we in the best of times.

Real wages are flat and trending the wrong way. Yet politicians from the president on down—and experts who should know better—tells workers to celebrate their good fortune.

What’s really happened is a redefinition of “good fortune.” Simply having a steady paycheck now means you should count yourself lucky.

Labor Isn’t Scarce

Economic theory says labor scarcity should force employers to raise wages. That’s indeed happening in certain segments. But it misses a crucial point.

Labor isn’t scarce in the growing number of occupations that can be automated. Supply is abundant if you include the machines.

I think this helps explain the wage puzzle. Low-wage workers don’t ask for more because they are (correctly) afraid of being replaced. And employers have little incentive to raise wages for those workers.

This probably won’t end well. As automation technology improves, millions of people will get steadily poorer and unhappier, and millions more will join them.

(I say “them” instead of “us” in hopes I won’t be in there too. But none of us should assume we’re safe.)

If we’re lucky, the mass un- and underemployed will peacefully line up to force changes like they did in 1980.

Get one of the world’s most widely read investment newsletters… free

Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.

By Patrick Watson

Copyright 2018 © Patrick Watson - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in