Friday, November 5, 2010

Wages and Inflation

Paul Krugman details the connection between wages and inflation:

I get a fair number of comments to the effect that worries about deflation are all wrong, look at commodity prices. I’ve tried in the past to explain why we should focus on sluggish, sticky prices, not volatile prices like commodities — hence core inflation. But let me add another point: arguably the stickiest, sluggishiest prices are those of labor. So why not focus on wages?

Source: BLS


  1. To be honest, contrary to the mantra you hear, the only good inflation is wage inflation. Backed by improvements in productivity of course. That's how we all get better off.

  2. I agree with Hotairmail. No wage inflation while food and gas go up on a "temporray" basis for years at a time is a monster hit to a person's lifestyle.

  3. i agree as well. BUT, good or bad there should really be no concern with inflation w/ regards to goods / services unless it feeds through wages.

  4. In 2010, wage growth YOY is over 2%, and inflation YOY is under 2%.


  5. I suspect the 2% wage growth is among those who are full-time employed. I say this b/c federal "Withheld Income and Employment Taxes" figures ending 9/30 show -0.7% YoY (nominal) from last year and -7.3% from 2008. These are actual funds received from payroll taxes, so they're not reliant on BLS statistical inferences.

    I don't think average payroll tax rates have declined by 7% since 2008, and population growth is a little over 1%, so average actual pay is not well represented by the hourly wage growth in the graph.

    In other words, hourly wage growth may track inflation, but average total pay does not seem to do so. Comparing CPI rate with wage rate may make more sense if consumption declines at a comparable rate to hours worked (since Americans don't save much).

    So, even under an argument based on his selective data, Krugman is comparing apples and oranges, I think.

    Regardless of which inflation measure is used for analytical purposes, people still have to pay for gas and groceries (typically about 25% of household expenditures, but around 50% for lower classes), so total inflation (not just core) seems to be a more appropriate measure for standard of living changes.

  6. What if the CPI doesnt measure anything useful?

  7. "I suspect the 2% wage growth is among those who are full-time employed."

    You are correct... it is for those working.

  8. Another perspective: