Wage Gains for Middle-Wage Workers Are a Good Sign, Not a Threat

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

Today’s jobs report showed a bit of a positive bump up on the wage side, which, if it sticks, is good news, because one feature of our underwhelming recovery has been weak wage growth for the vast majority of the workforce.  Bringing recent inflation trends into the mix is also important in such analysis, for a couple of reasons.

The figure below shows year-over-year growth of hourly earnings and consumer prices.  A couple of data points. First, I’m using the BLS wage series here that refers to “production, non-supervisory.”  That means we’re looking at the growth in hourly earnings of blue-collar workers in manufacturing and non-managers in services (about 83 percent of the workforce).  I chose this series because it’s more emblematic of the typical worker’s paycheck, and less influenced by above-average gains at the top of the pay scale.  Also, we don’t have inflation data yet for the last data point in the figure (last month), so I estimated the most recent month with a simple forecasting model.

Source: Bureau of Labor Statistics.

Since the last quarter of 2012, nominal hourly wage growth for these workers has accelerated a bit, from around 1.5 percent back then to about a point higher now.  At the same time, inflation has decelerated, from almost 3 percent back in early 2012 to about half that pace now.

That implies a few important facts.  First, middle-wage workers were losing ground in real terms â€" price growth exceeded their hourly wage growth â€" but are now gaining a bit of ground in real terms.  That’s an unequivocally positive development, but one that I fear in the wrong hands could be misinterpreted as leading to inflationary pressures that must be stomped out by tighter monetary policy.

This would be a very large mistake.  As I stressed, inflation is decelerating (importantly, unit labor costs â€" compensation per unit of output and a crucial determinant of inflation â€" fell almost a percent over the past year).  Real wage gains, especially for middle- and low-wage workers is highly desirable, has been sorely lacking, and is precisely what we should be seeing more of as this thus far sluggish recovery hopefully gains momentum.

So let’s be very careful not to confuse a very good sign with a threat.