Leonhardt Gets it Wrong on Wages

Real wages have followed an unusual pattern in this downturn, but NYT columnist David Leonhardt misses much of the picture in his column today. Leonhardt tells readers that most workers are seeing their real wages rise in this downturn. That is not quite right.

The real story of real wages is that hourly wages were falling sharply in the spring/summer of 2008, largely as the result of the rising price of oil and other commodities. Nominal hourly wages were rising at close to a 3.5 percent annual rate, with inflation rising at a rate of 5-6 percent. However, as readers of BTP know, real hourly wages reversed course and rose sharply after the Lehman crisis turned the recession into a free fall. While nominal wage growth continued on its path through the fall, prices fell at a double-digit annual pace in the last three months of 2008.

The story then reversed in 2009. Inflation has advanced at close to a 3.5 percent annual rate thus far this year. Nominal wage growth has fallen sharply. The nominal hourly wage is now rising at an annual rate of between 1-2 percent. (Monthly numbers are erratic, which makes it difficult to pin down the growth rate more precisely.) For 2009, real wages have unambiguously been falling and are likely to continue to fall as modest increases in commodity prices are not offset by nominal wage growth.

So how does Leonhardt get the story so wrong? Most importantly he uses year over year data. This includes the large fall in prices at the end of last year, which still outweighs the impact of falling real wages through 2009. Using year over year data, we can say that real wages have risen in the last year. We will not be able to say that four months from now.

Leonhardt also uses weekly rather than hourly data. This adds to the error in the measurement, since hours are also erratic month to month, and the random movements in reported hours can easily swamp the actual movement in the hourly wage. Finally, he misreads a recent data release, the June employment cost index. This release showed an insignificant rise in the rate of compensation growth between the first and second quarter. The increase is completely driven by a modest rise in the rate of reported compensation growth in the public sector, with the private sector showing no increase at all.

In short, there is no good wage story for most workers at this point. There was good news last fall when gas prices were tumbling, but that's history now.

--Dean Baker