Stop claiming that wages are starting to rise
Matthew Martin 6/02/2015 08:44:00 AM
"total compensation per hour is rising more rapidly" —Martin Feldstein
"inflation-adjusted annual earnings growth, which you can see has accelerated a lot since last winter" —Matthew YglesiasUm, no:Actually the recent acceleration of wage growth has been entirely the result of a fall in normally volatile prices like gasoline. Those prices will go back up, and when they do they will wipe out all of the "acceleration" in wage growth.
The truth is that wages don't do very much, in general. You can see from the graph above that actual nominal wage growth is basically flat. Commentators like to look at annual percent changes where it's easier to see changes, but the presentation of those graphs tend to dramatically overstate the volatility in wage growth. Here's what happened to wages during the Great Recession, in context:I compared wage growth to GDP because the latter is an aggregate of everyone's incomes, and wages are one of the main sources of individuals' incomes. I included inflation because it is a measure of the growth in prices and wages are one of the main kinds of prices in the economy. During the recession GDP plummeted, prices plummeted, but wages hardly budged. Probably that long deceleration in wage growth from 2006 to the present was caused by the recession, but really if we did not have such strong priors that wages and recessions should be related, we might not draw that conclusion from this data.
My point here is that nominal wage growth is extraordinarily sticky. This fact is underappreciated in both academic circles and the commentariat. In academia, macroeconomists need to recognize that we're working with a New Keynesian world with sticky wage growth not Calvo pricing. In the commentariat, columnists need to understand that wage trends just don't change fast enough to do real-time commentary, and that in general volatility in real wages has a lot more to do with inflation than wages.