The NYT had a front page article noting that real wages for most workers have begun rising in the last few months. This is of course good news -- the vast majority of people get the vast majority of their income from working -- if wages don�t rise, most people are not benefiting from economic growth. But the article gets a bit carried away at points. For example, the lead sentence asserts that �after four years in which pay failed to keep pace with price increases, wages for most American workers have begun rising significantly faster than inflation.� The use of �significantly� in this sentence can be disputed. It is true that real wages have been rising rapidly in the last few months, but this is because of the plunge in gas prices, that was clearly a one-time event (as later acknowledged in the article). The reality is that nominal wages are rising in a neighborhood of 3.9 percent to 4.0 percent, while the underlying rate of inflation is in the range of 2.5 percent to 3.0 percent, translating into real wage growth of between 0.9 percent and 1.5 percent. This is a decent rate of real wage growth, but certainly not extraordinary. Average hourly wages grew at a real annual rate of 1.5 percent from the beginning of 1996 to 2000. From 1964 to 1973 real wage growth averaged more than 1.6 percent. So, the current rate of wage growth is respectable, but not extraordinary, especially following almost 5 years of wage stagnation. These points are noted in the article, but the article also features Ed Lazear, President Bush�s chief economist, saying that �the pay increases are huge, even relative to a period we think of as good.� The article also implies that income inequality is being reversed commenting �after years of sharply rising wage inequality, the recent rise in wages also appears to be increasing pay for both rich and poor. It then reports that real wages for workers at the tenth decile have risen by 0.1 percent over the last three months, while real wages for workers at the 90th decile have increased by 0.4 percent. That sounds like continuing growth in inequality to me. (The source for this data is the current population survey, which provides very erratic data over such short periods.) But the most annoying part of the article is the comment, �wages have risen so swiftly that some economists worry that they could push inflation up.� This is true, economists (including Federal Reserve Board chairman Ben Bernanke) are very worried about wage growth, but it would have been worth noting the implication of this statement. It implies that some economists believe that it is unacceptable for workers to enjoy any wage gains � as soon as they start to experience wage gains, inflation is a problem. Many economists (perhaps most) hold a view like this, but the public should be aware of this issue because it raises fundamental questions about economic policy. Is the Federal Reserve Board always going to turn off economic growth whenever the labor market tightens enough so that workers can benefit? If this is the policy, shouldn�t the people know? This article could have presented the basic story of wage trends and the Fed�s potential response in a much more coherent manner. As it is, most readers would have a difficult time understanding either.
--Dean Baker
