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Is Low Inflation the Path to Real Wage Growth?

Photograph by Nathaniel St. Clair

I try not to miss Dean Baker’s short pieces on wages, inflation, and jobs, and I learn a lot from him. His post, “The Story of Stagnant Wage Growth,”  (Beat the Press, August 4, 2018), made me remember that unusual price changes can cause short-term shifts in real wages. It also made me think about whether we should focus on inflation spurts to explain slow or no growth in real wages in recent years and also whether low inflation can be a key to real wage growth.

Dean Baker seems to exaggerate the extent of real wage growth in the last five years. He graph shows not much progress for several months in 2013-2014 and a number of bad months at end of the last five years. I think Dean’s text tends to underestimate the bad periods. It is true that real wages have grown at times, but they have also not grown at other times. Overall, real wages for rank-and-file workers have increased by a total of 5% in the last five years. That’s good. But while better than stagnation, 1% a year is not going to reverse forty years of mostly lousy wages.

History suggests that in recent times even fairly modest rates of inflation often eat up wage increases. The monetary authorities want prices to rise 2 to 3% a year, which is about what prices are doing now. But that means that if you are a worker getting nominal pay increases of 2 to 3%, you are standing still. And 2 to 3% inflation is pretty typical. The main culprit may be energy prices or housing prices, or food prices or health care costs or college tuition or some combination. But a 2 to 3% annual increase in the consumer price index is not uncommon in the last few decades. It means that nominal pay–the face value of the paychecks of average workers–must rise 4% or more a year over the long haul if real wages are to being a big U-turn to solid, long-term growth.

The history of the 1980s, 1990s, and early 2000s is illuminating. The 1980s began with two recessions. The second, giant one started in 1981. Paul Volcker caused it and Ronald Reagan went along. Inflation rates came down, from three years of more than 10% to roughly 3 to 4% a year. That was the miracle of the Reagan-Volcker Recession. But the recession and Reagan’s attack on unions added to other forces that disempowered the working class. Nominal pay rose 24.4% over 1983-1990, about 3% a year. But prices rose 31.2%, even in this low-inflation period. That was roughly 4% year. As a result real wages fell. In other words, inflation in consumer prices was not soaring at 9 or 10%, but even lower inflation rates that people were glad to see wiped out wage gains.

In the 1990s, which are generally thought of as low-inflation years, consumer prices rose 32% (31.8% over 1990-2000); nominal pay increased 37% which sounds wonderful. But after the  effects of inflation are included, real pay increased for the whole decade 4.9%. That’s all. Just 5% for a decade that ended with years of strong demand for labor and a period that was thought to shine for low inflation rates.

In the 2000s before the Great Recession, if you forgot about inflation, you’d have been thrilled. In nominal face-value dollars, hourly pay for the average worker increased 29% from 2000 through 2008. But while inflation rates were fairly moderate at 3% a year, that was enough to wipe out most gains in purchasing power. The average real wage in 2008 was just 3% over the average real wage in 2000. That’s less than one half percent a year.

So what’s the big take-away? Everyone knows that real wages are not progressing much. One point is that trying to get strong wage growth by hoping for very low inflation rates is a losing proposition. A second point is that thinking that wage increases of 2 to 3% are going to be enough to make for real advances is wrong. This is not big news but it means that people on our side have to be forthright about what is necessary. Many people need a lift now to $15 or even $20. And on average workers must see increases in their face-value hourly pay of 4% a year or more every year, and 5% for lower-wage workers. And if we want nominal increases of 4% or more, we must–it’s no secret–focus on politics, organization, minimum wage laws, and propaganda about social justice. The caps grab too much of the national income pie. That’s the number-one overarching economic problem of our time.

Most of the data in this piece is from the United States Bureau of Labor Statistics and from the Dean Baker article mentioned in the first paragraph of my essay. Also useful is Baker’s Prices Byte on the latest inflation report, “Rising Rents Continue to Drive Inflation: Core Excluding Shelter Up Just 1.5% in Lat Year,” August 10, 2018.

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Frank Stricker is in the National Jobs for All Coalition. He taught history and labor studies at CSUDH for thirty-five years. He has just written What Ails the American Worker? Unemployment and Rotten Jobs: History, Explanations, Remedies. For some sources behind this essay, e-mail frnkstricker@aol.com.

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