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What are the prospects for wages in Minnesota?

Yesterday, I wrote about nominal wage increases in Minnesota. From February to July, nominal weekly earning rose by 2.1%, according to data from the Bureau of Labor Statistics (BLS). That is how you get a chart like Figure 1.

Figure 1: Average Hourly Earnings of All Employees: Total Private in Minnesota, Dollars per Hour, Monthly, Seasonally Adjusted

Source: Bureau of Labor Statistics

This is pretty good news. But only up to a point. As I’ve written recently, inflation has been ticking up too. If your wage rises by 2.1% in nominal terms in a given period but inflation also rises by 2.1% over that period, your real wage hasn’t increased at all.

We see this in Figure 2. This shows the above data for hourly earnings in Minnesota adjusted for inflation both from the national CPI and a series for Minneapolis-St. Paul produced by the BLS.

Figure 2: Real Average Hourly Earnings of All Employees: Total Private in Minnesota, Dollars per Hour, Monthly, Seasonally Adjusted, July 2017 dollars

Source: Federal Reserve, Bureau of Labor Statistics

This tells a less happy story. While we still see that uptick from February, this follows a real terms decline in average weekly earnings in Minnesota over the course of 2017. As a result, in real terms, pay in July 2018 was exactly where it was in January 2017.

We need to do better. To improve people’s economic well being we need wages to rise in real, not just nominal terms. What are the prospects?

Well, inflation ran at 2.6% between July 2017 and July 2018. The Federal Reserve notes that “that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve’s statutory mandate”. If the Fed acts to meet this target – and does so – then the current rate of nominal wage increases – 2.1% between July 2017 and July 2018 – will be enough to raise real wages.

There are other encouraging signs. Minnesota’s Labor Force Participation Rate is one of the lowest in the country and there is talk of a ‘labor shortage’. As rising demand for labor runs increasingly up against supply constraints, we should see the price of labor – wages – rise at a faster rate than we have been seeing.

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