Is Low Inflation the Path to Real Wage Growth?

Photograph by Nathaniel St. Clair

I try not to miss Dean Baker’s short pieces on wages, inflation, and jobs, and I learn a lot from him. His post, “The Story of Stagnant Wage Growth,”  (Beat the Press, August 4, 2018), made me remember that unusual price changes can cause short-term shifts in real wages. It also made me think about whether we should focus on inflation spurts to explain slow or no growth in real wages in recent years and also whether low inflation can be a key to real wage growth.

Dean Baker seems to exaggerate the extent of real wage growth in the last five years. He graph shows not much progress for several months in 2013-2014 and a number of bad months at end of the last five years. I think Dean’s text tends to underestimate the bad periods. It is true that real wages have grown at times, but they have also not grown at other times. Overall, real wages for rank-and-file workers have increased by a total of 5% in the last five years. That’s good. But while better than stagnation, 1% a year is not going to reverse forty years of mostly lousy wages.

History suggests that in recent times even fairly modest rates of inflation often eat up wage increases. The monetary authorities want prices to rise 2 to 3% a year, which is about what prices are doing now. But that means that if you are a worker getting nominal pay increases of 2 to 3%, you are standing still. And 2 to 3% inflation is pretty typical. The main culprit may be energy prices or…

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