Real vs. nominal wages

Mitchell Hartman Sep 4, 2015

Average hourly wages for American workers increased more in August than July — 0.3 percent, versus 0.2 percent the month before, according to the Labor Department. That pushed the yearly hourly wage increase to 2.2 percent from 2.0 percent.

But even 2.2 percent wage inflation is considered anemic by many economists. That rate of income gain is well below the 3.5 percent to 4.0 percent rate of increase that would meet the Federal Reserve’s inflation target, according to a briefing by the Economic Policy Institute, and would enable American workers get ahead after the bite that price inflation takes out of their wages. With nominal wages having increased in the 1.8 to 2.2 percent range over the past several years of economic recovery, Americans are just barely keeping up with inflation, according to EPI.

However, in recent months, improvements in real wages — wages adjusted for inflation — have given Americans a greater sense of prosperity. That’s because of declines in key commodity prices, especially oil. With gasoline prices down, Americans have more money in their pockets to pay for other things — necessities, like rent and utilities, and discretionary items, like jewelry, concert tickets or a fancy dinner out.

(Courtesy White House) 

“There’s been very little change in wage growth over the entire recovery, and that sends a signal that the relative bargaining power of workers and employers hasn’t changed, either,” says labor economist Gary Burtless at the Brookings Institution. “We’ve seen nominal wages rise about 2 percent per year” during the past five years of the recovery, Burtless says.

Based on the August employment report, that rate has now been running slightly higher—at 2.2 percent—for the past 12 months. But, Burtless  says, “the increase is not statistically significant given the uncertainty about the wage reports.”

“It’s true that over the past year, real wages — wages adjusted for changes in consumer prices — have increased about 2 percent,” says Burtless. “That’s because we’ve seen almost no change in consumer prices, because of changes in energy and food prices that have helped workers’ paychecks go further. That’s an indicator of what’s going on in the world economy, of what’s going on to affect these very sensitive prices for energy and food. It’s not an indicator of any improved bargaining power on the part of American workers.” 

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