Big News: Arithmetic Problems at the Council of Economic Advisors

Economists are supposed to be good at math. It is a great honor for an economist to be appointed as head of the President's Council of Economic Advisors. For these reasons, it should be big news that the person currently holding this position apparently has problems with simple arithmetic.

According to an article carried by Dow Jones Newswire, Ed Lazear, the current chief of the Council of Economic Advisors, claimed that wage growth "seems to be taking off right now." The article reports Mr. Lazear's view that workers now seem poised to get substantial real wage gains.

If the article presented Mr. Lazear's comments accurately, then it missed the real news. Nominal wages are at best just keeping pace with inflation, leaving no room for real wage growth. From June 2005 to June 2006, the average hourly wage increased by 3.9 percent in nominal terms. From May 2005 to May 2006 (the June data is not yet available) the consumer price index increased by 4.1 percent. This means that the real wage fell by roughly 0.2 percent over the last year.

If we focus on just the last three months, nominal wages rose at a 4.5 percent annual rate over the three months April, May, and June compared with the prior three months. This is equal to the annual rate of growth of the CPI in the three months of March, April, and May compared with December, January, and February. In other words, the most recent data indicate that wages may now be just keeping even with inflation.

If wages have slightly trailed inflation over the last year and are just now roughly breaking even, how can President Bush's chief economist say that wage growth "seems to be taking off?" Mr. Lazear either does not know arithmetic or is not being honest. The fact that he is making a claim so completely at odds with reality should have been big news. (Thanks to PGL for the tip.)

--Dean Baker

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