Friday, February 06, 2009

The Great Real Wage Shock

The perhaps most significant untold story is the dramatic surge in real wages in recent months. I've mentioned this briefly in relation to my commentaries about the job reports of the last few months, but as far as I know the only economics bloggers apart from me that have mentioned this are Dean Baker on the left and Mark Perry on the right. And as far as I know, no one in the mainstream media has mentioned it. Indeed, some like Paul Krugman have as I mentioned in the previous post even tried to falsely claim that there have been "widespread wage cuts".

This is kind of strange, given just how much real wages have gained. If you go to the Bureau of Labor statistics web page and look at the table "total average private hourly earnings, 1982 dollars", you can see that while real average hourly earnings were stagnant between July 2001 and July 2008, at $8.12 in 1982 dollars at both the beginning and end of that period, it soared to $8.64 in December 2008. The average real compensation during the fourth quarter was $8.50, up from $8.16 in the third quarter, a gain of 4.17% or 17.7% at an annual rate. The increase from September to December was even more dramatic, 5.5% or 23.9% at an annual rate. And in January, nominal hourly wage rose another 0.3% and while the CPI for January is not available yet, it is more likely to post another decline than an increase, meaning further gains in real wages.

What this means is that the large job losses in recent months really don't reflect so much a decline in real output, as it reflects a massive real wage shock.


Anonymous pinus said...

I think you can't really make your conclusion from the data you present. Naturally, if you sack a disproportionately large amount of low-paid workers, the average hourly compensation can go up even if the compensation of each individual worker goes down.

Although I am at least partly sympathetic to your claim (or, for that matter, similar claims made e.g. by Casey Mulligan), it is incorrect to make such a conclusion based on the given statistics. I assume you have other data that better support you claims.

11:14 PM  
Blogger notgreat said...

I'm not sure I understand: you're saying people got laid off because they were getting paid too much as the CPI became negative but their nominal wage didn't adjust downward?

12:58 AM  
Anonymous Anonymous said...

This news should be a wondrous panacea for the multitude out of a job and those economically competing with the millions of illegal aliens usurping the supply/demand equation regarding wages, rental costs, etc.'

2:17 AM  
Blogger happyjuggler0 said...

My first instinct was to think as you did, that the large increase in unemployment was due in part to the large increase in wages.

But does that really make sense, that workers could manage a large increase in wages at a time when the mass media were screaming "worst recession since the Great Depression"?

Instead, perhaps it is the other way around. Perhaps the large increase in unemployment is disproportionately amongst low income workers, along with a cut in hours amongst workers who are paid by the hour (who are almost always lower wage workers)?

Lop off the bottom of a sample, and the mean average of the sample goes up, without anyone's wages changing one bit (excepting unemployed workers who suddenly are making $0.00 per hour, but they don't count in the averages).

Both hypotheses fit the data, but mine seems more logical I think.

4:15 AM  
Blogger stefankarlsson said...

Pinus & Happyjuggler: I do believe that disproportionate job cuts for the low productive explains part of the real wage increase, but the increase is simply far too big for that to be the only or even the main explanation. And that is in fact consistent with my contention that much of the job losses do not reflect falling real output.

Notgreat: Yes, if wages had fallen, especially in certain sectors like construction, then we wouldn't have seen all of these job losses.

That however doesn't mean that if oil had been more expensive and real wages for that reason had been lower, that employment would have been higher as that would have meant that the real value of output would have been lower.

Obbop: You're clearly sarcastic, but the point wasn't that it was good for everyone, just for those who still work as many hours as before. Incidentally though, the part of the real wage gain that is caused by price deflation will benefit even those who receive unemployment benefits or other fixed non-wage income.

8:13 AM  
Anonymous Anonymous said...

What is the source of the real wage shock?

12:47 PM  
Blogger stefankarlsson said...

As I discussed in my previous comment, there are 3 explanations

1) People with low productivity have lost their jobs to a higher extent than others.

2) The positive terms of trade effect from the slump in oil prices.

3) Inflexible wages that means that they do not fall as they should right now, something which causes unemployment to go up while the also raising real wages for those that still have a job.

6:28 PM  
Blogger chertosha said...

It might be an artifact of how the data is constructed:
the nominal wages never change significantly, and neither did they this time
If you look at the CPI, which you divide by to compute real wages, and exclude energy, there will be no change in real wages whatsoever.
Here is how energy price affect the cpi:

9:26 PM  

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