fbpx

Latest Posts

Home

Facebook

Twitter

Search
About

Wages need to rise in real terms, not just nominal terms

Last Thursday, the Department of Labor reported that prices had risen at their fastest rate since 2012 over the past year. For the 12-month period ending in June, inflation clocked in at 2.9%. This might be good news to central bankers, but to the average American it is probably less welcome.

As the Chicago Tribune reported,

The cost of food, shelter and gas have all risen significantly in the past year. Gas skyrocketed more than 24 percent, rent for a primary residence jumped 3.6 percent and meals at restaurants and cafeterias rose 2.8 percent.

Prices have risen roughly at the same rate as wages, erasing any gains workers may have hoped to realize via bigger paychecks.

One of the first things you learn in economics is the difference between nominal increases and real increases. If your wage goes up from $500 a week to $1,000 a week, you have had a nominal pay rise of 50%. But if prices also double, your new money can’t buy you any more than you could buy before. In this case, your real pay rise is 0.

As Federal Reserve Chair Jerome Powell told NPR, “we’re starting to see” some pick up in wages after lackluster growth in recent years. We have seen this here in Minnesota. But we are also starting to see prices rising at an increased rate. The latter is cancelling out the former.

There are a number of causes for the recent increase in the inflation rate, the new tariffs being one, monetary policy another. For reasons to arcane to go into here, central bankers have, in recent years, been desperate to get prices rising again.

After a prolonged period of wage stagnation, the recent rise in wages is to be welcomed. But it won’t help folks much if rising prices cancel out the benefits.

John Phelan is an economist at the Center of the American Experiment. 

Comments

Subscribe

Categories

Upcoming Events

  • Morning in Minnesota: St. Cloud

    Location: St. Cloud

    Sign up HERE! Courtyard by Marriott St. Cloud 404 West Saint Germain Street St. Cloud, MN, 56301 Please join Center of the American Experiment on Tuesday, July 21 for breakfast with Center policy fellow and education expert Catrin Wigfall as she explains K-12 education in the state and its persistent disparities despite decades of increased spending. Following her presentation, Catrin will lead a Q&A session. 7:30 AM Check In and Breakfast 8:00 AM Presentation 9:00 AM Conclude   Catrin Wigfall is a Policy Fellow at Center of the American Experiment. She is also the director of EducatedTeachersMN and EmployeeFreedomMN. Catrin’s…

    Register Now
  • Kristi Noem: The Courage to Reject a Shutdown

    Location: Online

    Sign up HERE! Join us Wednesday, July 8th for an interview with South Dakota Governor Kristi Noem over Zoom. In response to COVID-19, Noem defied the norm of a statewide shutdown and let South Dakotans choose for themselves what safety precautions to take. Tune in to this live online event to hear how Governor Noem preserved her state’s economy while still keeping citizens safe. Wednesday, July 8th at Noon CT Sign up HERE!  

    Register Now
  • Morning in Minnesota: Marshall

    Location: Marshall Golf Club

      Sign up for this event HERE! Please join Center of the American Experiment on Thursday, July 16 at Marshall Golf Club for a breakfast with Center economist, John Phelan, as he discusses Minnesota’s economic future. Following his presentation, John will lead a Q&A session. 7:30 AM Check In and Breakfast 8:00 AM Presentation 9:00 AM Conclude John Phelan is a graduate of Birkbeck College, University of London, where he earned a BSc in Economics, and of the London School of Economics where he earned an MSc. He worked in finance for ten years before becoming a professional economist. He…

    Register Now