Correct Measures

Matt Yglesias:

Nominal wages up 2.5 percent in 2004, consumer price index up 2.7 percent, net wages negative 0.2 percent... If wages are falling, the labor market is bad, and it's as simple as that.

The LA Times:

For the first time in 14 years, the American workforce has in effect gotten an across-the-board pay cut.

The growth in wages in 2004 and the first two months of this year trailed inflation, compounding the squeeze from higher housing, energy and other costs.


This is the first time that salaries have increased more slowly than prices since the 1990-91 recession. Though salary growth has been relatively sluggish since the 2001 downturn, inflation also had stayed relatively subdued until last year, when the consumer price index rose 2.7%. But wages rose only 2.5%.

The effective 0.2-percentage-point erosion in workers' living standards occurred while the economy expanded at a healthy 4%, better than the 3% historical average.


With benefits factored in, workers' total compensation did outpace inflation in 2004, even if they didn't see it in their paychecks. But employers also are requiring workers to pay a greater share of their premiums.

Me: So which is a better measure - wages, which represent only a fraction of workers' compensation, or total compensation, which represents the whole damn thing? Honest answers only, please.

If total compensation is rising, the labor market is not bad, and it's as simple as that.

Arnold Kling has more.

Update: As does Deinonychus antirrhopus.

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a) That 4% growth in the

a) That 4% growth in the economy probably went somewhere, just not into wage increases. This sends a signal that people should diversify their income streams. Me, i've taken wages entirely out of my income portfolio for 2004. More gift income, more barter, some reduction in basis to my real estate holdings, a lot of diy stuff, so the net package is non-taxed.
b) 0.2% is statisticly insignificant. What are the 5 and 10 year numbers like?
c) a rise in the cost of benefit packages may not translate to higher compensation to the worker - dollars at least are fungible.
d) measured in euros, you get a very different answer. what did wages do in 2004 in e-gold?
e) how much of the basket of goods is subject to moore's law? In 2004, I paid $100 for a P2. In 2005, I anticipate paying $25 for a P3.
f) The model fails to account for elasticity of demand. The 2004 basket had higher prices for some things than the 2003 basket, and lower prices for other things. A 0.2% drop can be accomodated by buying less of the now more expensive things and more of the now cheaper ones.
g) What did world wages do in 2004? Went way up? The relative advantage of being in the usa wage market decreased, which is probably a good thing.

Should we really be worried

Should we really be worried about something like
Benefits included (total comp)
After tax
ceteris paribus workers from some kind of wage regression (to adjust for compositional shifts in population, such as changing age/experience, educational attainment, and the slew of other individual-level characteristics)

I know you didn't ask, but

I know you didn't ask, but theres one critical flaw. Using the CPI as a measure of inflation gives a completely useless data output. It can't be trusted.

Damn, 80 whole dollars less.

Damn, 80 whole dollars less. There goes two Playstation games.

Given that wages are

Given that wages are inherently likely to lag consumer prices, especially without any labor shortages of significance, and that consumer prices are likely to finally respond to monetary supply inflation, no matter how much they adjust the numbers, it would seem that a 0.2% wage deficit is miraculously small.

Regards, Don

A lot of retirement savings

A lot of retirement savings are based on linear assumptions about future interest rates which are hopeless. Assuming 2% inflation is going to make you a very poor individual.I'd use 7-9% as a safety margin in this decade long inflationary environment until you see commodities ie the CRB begin its long trek backwards or see cash become worth a lot more, in which case your staring a full blown deflation in the face and won't have a job anyway.

Yes,as long as wages are

Yes,as long as wages are rising faster than prices locally, the average worker is doing great. But how do we measure prices for the average worker? In any case we're in the 8th inning of the law of diminishing returns for Keynesian economics, which is why the price of gold, copper and everything else is going nuts in $US terms. All the juicy stuff has been stripped out of the CPI and now smoke is coming out the porthole.:roll: