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Withering Wages
Subject Inflation
Topic Employment, Unemployment, and Inflation
Key Words Inflation, Productivity, Real Wages
News Story

One of the most significant benefits of the booming economy has been the growth in real wages, that is, wages adjusted for inflation. Real wages have increased steadily since January 1996 - until this year. The problem is the increase in inflation. The Consumer Price Index (CPI) grew at about a 2 percent rate for 1997 and 1998. In the past 12 months, inflation has risen 3.5 percent matching most or all of this year's wage growth.

For about 25 years prior to the 1990s, real wages were either stagnant or had actually decreased. Since 1996, wage gains have been between 3 to 5 percent per year depending upon the measure used. Unlike previous periods, practically all segments of the labor force shared in these wage gains. Hourly earnings data and the Employment Cost Index still show wage gains in the same range but these gains are matched by increased inflation.

Oil prices are primarily responsible for the higher inflation. OPEC has promised to increase production, which should lower gasoline prices, heating oil and inflation. If inflation continues to match wage gains, many fear that workers will agitate for higher raises in order to keep ahead of inflation. The push for higher wages has not as yet occurred, they argue, because workers still believe that the long run inflation rate is still less than 3 percent. Wage rates in excess of productivity gains can lead to price hikes and an inflationary spiral.

Other economists argue that this inflation scenario will not occur because workers are more passive than in the past. The reasons that are cited for this passivity are globalization, job insecurity, the decline in the power of labor unions, immigration of low-wage workers, and the relocation of firms.

(Updated October 1, 2000)

Questions

1. Explain the difference between nominal wages and real wages. Why might workers be more concerned with real increases than with nominal ones?
2. What is cost-push inflation? What factors could lead to cost-push inflation?
3. What factors influence a workers long term expectation of inflation?
4. What role does productivity improvements play in this argument, that is, can productivity increases offset inflation?

Source Louis Uchitelle, "Those Raises, Adjusted for Oil Inflation, Are a Mirage," The New York Times, September 10, 2000.

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