April 27, 2004

April 27, 2004 | WebMemo on Economy

The Real Story on "Stagnant" Wages

When the next employment situation report is released on May 7, 2004, expect very little discussion of the low unemployment rate, strong job growth, or increasing labor participation. Now that payroll jobs are growing again, the economic skeptics are falling back on a new line of defense: "stagnant" wages.


But there are two problems with the "stagnant wages" claim, one theoretical and one factual. Theoretically, there really is no battle between capital and labor, which all "poor labor" arguments implicitly assume. Successful employers have forever seen the advantages of recruiting, retaining, and motivating the workforce with good pay and benefits. 


On the facts, it is true that real wages have been "stagnant" for the last year or so, but only in the sense that they remain high and have not declined.


Average Hourly Earnings Graph
The chart above shows the relentless upward progress of real average hourly earnings, as reported by the Department of Labor. Measured in constant 1982 dollars, hourly earnings rose up from $7.60 in 1997 and 1998, stabilized for two years, rose again during the 2001 recession, and have held at roughly $8.25 since.


Growth Hourly Earnings
The recession started three years ago in March 2001. Now, 36 months later, real hourly earnings are 1.85 percent
higher. Compare that to the 1.95 percent loss on the 36-month anniversary of the 1990-91 recession. Three years after the 1980-82 recession started, real earnings had also declined by 1.49 percent.


The coming stories about flat real wages in 2004 bring to mind many counter-arguments. First, we might note that inflation statistics have been overstated for decades, as described by the Boskin Commission and many nonpartisan economists, which implies that real earnings have been underestimated. Or we could compare Americans' after-tax incomes, which are much higher after the passage of the 2001 and 2003 tax cut packages. Or we could talk about how consumption remains robust. Or we could ponder the dramatic rise in non-wage employee benefits.


But those arguments simply aren't necessary. The U.S. labor market is in the midst of a solid recovery after the 2001 contraction, but don't forget that real earnings never recessed in the first place.


Tim Kane, Ph.D., is Research Fellow in Macroeconomics in the Center for Data Analysis at The Heritage Foundation.

About the Author

Tim Kane, Ph.D. Visiting Fellow
Center for Trade and Economics (CTE)