Tough Times

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In a widely read column on Tuesday, David Leonhardt said that although unemployment is high, there’s good news for those who still have jobs.  Instead of falling, as they normally would during a recession, real wages have risen at a steady clip this year.  Now, there’s no question this was true in the second half of 2008, when nominal wages rose modestly but plummeting prices (especially energy prices) meant that in real terms wages skyrocketed.  Unfortunately, Dean Baker says those days are long gone:

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….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.

Italics mine.  Real wages have gone up if you compare August to August, which includes the big deflation in the Fall of last year.  But that’s a one-off.  If you look at January to August instead, inflation is up, wage growth is anemic, and real wage growth is negative.  That’s the path we’re currently on, not one of rising incomes.

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