What wage mystery?
By Scott Sumner
The New York Times has a graph showing a slowdown in the rate of nominal wage growth, compared to the 1990s:
They then argue that this is a sort of mystery, which cannot be explained by slowing inflation:
So why has wage growth slowed since 2001, across many different measures, when unemployment is so low?
We can rule out two possible reasons immediately. It wasn’t because of a decline in inflation, and it wasn’t because benefits like health insurance and hiring bonuses crowded out wages.
As with wages, the government has many different inflation measures. But none that we analyzed have slowed by nearly enough since 2001 to explain the weakness in wage growth; some have even increased a bit.
And government data suggests that measures of pay growth that include nonwage benefits are also below their 2001 levels. Moreover, the fastest growth in nonwage benefits was before 1994; in recent years, the nonwage share of compensation has grown more slowly.
But inflation is the wrong variable; it’s NGDP growth that determines wage growth, not inflation. And NGDP growth has slowed since the 1990s, indeed it’s slowed by roughly as much as wage growth has slowed:
Note that NGDP growth generally runs a bit higher than nominal hourly wage growth, because employment also trends upward over time.
There’s no wage mystery. When NGDP growth slows, wage growth will usually (not always) slow as well. If you want faster nominal wage growth, then adopt a more expansionary monetary policy. If you want faster real wage growth, then deregulate the economy and do tax reforms that encourage saving. Printing money won’t boost real wages.
(David Henderson has a recent post showing that real wages are doing better than is widely reported, if measured properly.)
HT: Stephen Kirchner