October 28, 2005

Economy continues to expand, while real average wages experience fastest decline on record

Employers' wage costs grew 2.3% over the past year, the slowest growth rate on record, according to today's report from the Bureau of Labor Statistics.  Factoring in the recent energy-driven increase in inflation, the real wage is down 2.3%, also the largest real loss on record for this series that began in 1981.

With hourly wages falling in real terms, the only way working families can raise their incomes is by working more hours—certainly not the path to improving living standards that we would expect in an economy posting strong productivity gains.
 
This 2.3% rate is a slight tick down from the 2.4%—the previous historical low—that prevailed for the last four quarters. Compensation—wages plus benefits—also grew more slowly in the third quarter of this year, up 3.1% over the same quarter last year, the slowest yearly growth in six years.

For the first time in this employers' costs report, the BLS presented these values adjusted for inflation.  Both wages and compensation are losing growth in real terms, down 2.3% and 1.5%, respectively, as slower nominal wage growth is colliding with faster inflation.  In both cases, these are the largest yearly real losses on record.

This is a broad measure of earnings, including all civilian workers.  It thus reveals an ongoing, important imbalance in this economic expansion.  Overall measures of economic performance, such as gross domestic product, continue to perform well.  For example, real GDP grew by 3.8% in the third quarter, above expectations and an acceleration over the 3.3% GDP growth rate of last quarter.
 
Yet the wage and compensation results show that this growth is failing to show up in hourly earnings.  This has two implications.  First, the view that increasing labor costs are pushing up prices is clearly not supported by these data. There is no evidence of an over-heating labor market that needs to be cooled by Federal Reserve rate hikes.  Second, the resulting stagnant hourly wages will make it hard for working families to truly get ahead. 

By EPI economist  Jared Bernstein

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