Real wages: two years of losses
The economy has been in recovery since late 2001 and has been creating jobs since the fall of 2003. But despite the upward trend for jobs, the hourly wages of most workers (the 80% of workers who are in manufacturing or non-managerial services) have failed to keep up with inflation over the last two years. In the first quarter of 2005, real (i.e., inflation-adjusted) wages were 0.2% below those of the same quarter a year earlier. Real wages have fallen 0.3% over the last two years after rising by 2.0% over the prior two years starting in early 2001. The chart below shows the worsening real wage trends since early 2001. This erosion of real wages despite rapid productivity growth and continued job growth is disappointing and a real detriment to working families' living standards.
The rise in inflation over the last year, induced by higher prices for fuels and other commodities, might lead some to believe that higher inflation is the cause of the deterioration in wages. In fact, as the chart below displays, the slowdown in nominal (not inflation-adjusted) wage growth was more responsible for the poor real wage growth of the last two years than inflation. Nominal wages grew 6.1% in the two years following the first quarter of 2001 but just 4.3% in the next two-year period up through the first quarter of 2005. Meanwhile, the two-year change in prices went from 4.2% to 4.7%. Thus, 76% of the deceleration of real wages was due to slower nominal wage growth and 24% was due to higher inflation.
(Technical note: The price level in March will not be available until mid-March so we projected it based on the last 12 months. The 'decomposition' of real wage trends is done in logs.)
Job recovery still lags far behind
Payroll jobs are now 415,000, or 0.3%, greater than at the start of the recession 4 years ago (March 2001). However, private-sector jobs are still down by 389,000, a contraction of 0.3%. The 804,000 jobs created in the government sector in this time explain the difference between growth in total payroll and private-sector jobs. Overall, this level of creation represents the worst job performance since the Bureau of Labor Statistics began collecting monthly jobs data in 1939 (at the end of the Great Depression). In the three downturns since the early 1970s, the economy had not only recovered all the jobs lost during the recession but had also generated 6.3% more jobs (6.4% more private-sector jobs) than existed at the start of the recession. If this historical standard had prevailed in the private sector, the economy would have 7,140,000 more private-sector jobs today.
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