Economist's View: More Promises

More Promises

More promises that higher real wage growth is just around the corner from Allan Hubbard and Edward Lazear:

Coming of Wage By Allan Hubbard and Edward P. Lazear: ...In the past three years our economy has grown 3.7% per year, faster than any other major industrialized economy, and added more than 5.7 million payroll jobs... Yet questions understandably arise about whether this economic expansion is paying off for U.S. workers...
A pattern that prevails as the economy moves from recession to recovery, and then into a sustained expansion, is that productivity grows first. The higher productivity growth means higher profits for businesses, which induce them to expand output and then employment. Later, as fewer workers are available for hire, wages grow, profit rates fall, and workers' share of the gains rises. This is what we observed during the last expansion. After the recession in the early 1990s, wage growth was flat. It did not pick up until the last few years of the decade.
We are seeing the same pattern in this economic expansion. Productivity growth has been exceptionally strong in the past five years, well above the historical average. And now employee compensation per hour has also picked up. Over the first half of this year, compensation growth has averaged a remarkable 6.3%, at an annual rate adjusted for inflation. This growth is much faster than in previous years.
As has been the case for many years, higher health-care costs mean much of the growth in compensation goes to benefits. Although benefits are important, workers also naturally care about whether their paychecks are going up.
Recently, nominal wages of production workers have also grown considerably. At an annualized rate, nominal wage growth has been about 4% so far this year, faster than at this point in the last economic expansion. Nominal wages are now growing faster than the past couple of years and are growing at about the same rate as they were in the late 1990s.
The difference between this economic expansion and the last expansion is that higher-than-expected energy prices have consumed much of this strong nominal wage growth. Inflation-adjusted wage growth without the increase in energy prices is similar to past economic expansions. The issue here is energy prices, not wage growth. ...
The recent news on energy prices is good for workers. Nationwide gasoline prices have fallen by about 65 cents per gallon since early August and market data suggest that inflation will fall below the levels of the past few months. This decline, coupled with the nominal growth rates that we see in both compensation and wages, means that workers should enjoy more real earnings in the months ahead. ...

I would dispute that:

Inflation-adjusted wage growth without the increase in energy prices is similar to past economic expansions.

The relationship between wages and productivity we have seen after the last two recessions is not typical historically (NY Fed paper on this). When they say:

After the recession in the early 1990s, wage growth was flat. It did not pick up until the last few years of the decade.

The reason they note wage growth was flat is because it was atypical. They are pointing to the 1990s as a hopeful episode for workers - after many years wages finally went up they say, so be patient - but that sort of long delay in wage growth is a recent phenomena. Wages tracked productivity with much less lag prior to 1990 and it wasn't necessary to keep promising workers that real wage growth is just around the corner. They make such a promise when they say:

We are seeing the same pattern in this economic expansion. ... [W]orkers should enjoy more real earnings in the months ahead.

But it's hard not to think of Ed Lazear last May when he says:

Mr. Lazear said wages will catch up to productivity gains in the months ahead, boosting average pay. “We are moving into that phase where we expect that wage growth will catch up and eventually take over productivity growth.”

Five months later, we're still waiting for "the months ahead."

Posted by Mark Thoma on October 2, 2006 at 12:06 AM in Economics, Politics | Permalink