Are Low Wage Wages Keeping Up with Inflation

If accommodation and food service wages evolve in October in the same way the have covaried with overall leisure and hospitality service wages, then the answer is yes, for a variety of price indexes.

Figure 1: Average hourly earnings of production and nonsupervisory workers in accommodation and food services, in $/hour, deflated by CPI (black), chained CPI, seasonally adjusted (teal), and CPI-wage earners and clerical (red), into 2020$. NBER defined recession dates peak-to-grough shaded gray. Chained CPI seasonally adjusted by X-12/X-11 ARIMA. October observation on wages extrapolated from leisure and hospitality services average wage over 2021, using log first differences specification. Source: BLS, NBER, and author’s calculations.

So, even though actual CPI exceeded nowcasted CPI (as described in this post), real wages still rose for these workers.

(Aside: Is there a standard error for the estimate of average wages? The technical notes regarding average hourly earnings series indicates: “Average hourly earnings estimates are derived by dividing the estimated industry payroll by the corresponding paid hours.” In other words, the average hourly wage is not calculated by surveying a number of employees to obtain their earnings per hour, and then averaging over all the observed earnings per hour. Hence, there is not a standard error in the sense one might expect. )

45 thoughts on “Are Low Wage Wages Keeping Up with Inflation

  1. Moses Herzog

    I may be misreading this. BUt I feel that last sentence in the blog post is some kind of showing of respect (for a person who maybe doesn’t deserve that respect) for a certain commenter here who “went on about” standards errors. Happy to be corrected. Had some alcy-haul, happy to be corrected in my thoughts. I think it’s very kind and my drinking self approves of this courtesy to said Standard errors malcontent.

    Reply
  2. Moses Herzog

    I saw today the hourly wage at my favorite grocery store was $13 hours beginning pay. IN this “red state”, of my current residence, it’s not as laughable wage as one might imagine. Kind of interesting, there’s a SMALL pool of data point for you good social scientists. For the record, the workers at that store often seem tired, but I don’t see much turnover, and ALL of them (after shopping there roughly 3-4 years) are “salt of the Earth” type people, I might give a half hand out or defend them to another customer giving them shit, if that statement makes sense.

    Reply
    1. baffling

      “but I don’t see much turnover, and ALL of them (after shopping there roughly 3-4 years) are “salt of the Earth” type people”
      in the small town i grew up in, there was not much turnover at the stores either. biggest employer was walmart, which put the other small retail and grocery stores out of business. if you did not work at walmart, you did not get a local retail job. a few mini-marts and fast food that operated on teen labor filled out the rest of the labor pool in retail. those shops shut down or changed ownership faster than the workers could turn over to a new job, much of the time.

      Reply
  3. JohnH

    Peterson (written before this week’s inflation announcement:) “ Prices, however, have also risen rapidly, and so inflation-adjusted compensation increased by only 0.6 percent at an annual rate over the last three months. This increase was not enough to make up for its previous losses, so it is now 0.6 percent lower than it was in December 2019. Inflation-adjusted compensation should have grown 1.5 percent over this period if pre-pandemic trends had continued, leaving real compensation well below its pre-pandemic trend. While nominal compensation has grown faster in some sectors relative to its pre-pandemic trend, real compensation growth has been below trend in all sectors apart from leisure and hospitality.” https://www.piie.com/blogs/realtime-economic-issues-watch/worker-bargaining-power-has-been-no-match-high-inflation

    If American workers have the general impression that they are worse off under Biden, it will be devastating for Democrats next year.

    Reply
      1. Moses Herzog

        A LOT of people will quote an NYT story without ever recognizing who the writers were. Just a neutral comment for your dumbest commenter.

        Reply
        1. Moses Herzog

          * FROM your… I often wonder how many of my comments go this way, because of my horrible grammar habits, GOd bless my old students in China When I think about these things I justa about wanna kill my….

          Reply
  4. pgl

    Calling Dean Baker – please write on this controversy:

    https://www.biospace.com/article/federal-scientists-cry-foul-after-moderna-excludes-them-in-credits-for-its-covid-19-vaccine-/

    Moderna received lots of assistance from the NHI in developing their technology as well as the COVID-19 vaccine, which is an application of their approach. Moderna is reaping huge profits from the production and distribution of their vaccine. Moderna should share the patent rights with the NHI but so far they have not.

    This should be taken to court if Moderna does not back down. Now I would volunteer to write an analysis for the relative values of the efforts of the two parties and I’d do the analysis pro bono.

    Reply
    1. pgl

      ltr provides the twitter where Dean Baker writes:

      “It is ridiculous that the taxpayers cover much of the development cost of a vaccine, and then give a company a patent monopoly, and tell them they can charge whatever they want and control distribution”.

      The other day JohnH finally engaged on the economics of patent protection and trade deals noting Dean has written a lot on TRIPs. He has and everyone of his writings on this addresses patents in the life science sector. The TRIPs issue is much broader but can I just say Dean’s various posts on this specific issue are all worth reading. The COVID-19 issues make this all too clear.

      Reply
      1. pgl

        BTW a patent need not mean Moderna gets to charge whatever it wants. If we adopted for example a Medicare approach, the power of a government insurance company could offset the patent owner’s monopoly power. And maybe competition from other vaccine providers could help. But to the degree Moderna gets monopoly profits (and it is raking them in), NHI deserves its fair share.

        Reply
        1. baffling

          one problem with vaccines is that, if successful, they minimize their profitability going forward. this is why big pharma does not spend as much on vaccine research as other areas. there needs to be an incentive to be in the business. this is a tough model to operate in. the covid vaccine is just like the flu vaccine, a big success and a big failure. it is a success in that mortality is reduced. it is a failure in that it requires yearly boosters-so not a permanent fix. these types of vaccines can be profitable, but you really don’t know how the vaccine will work until after it has been developed. in vaccine research, nih cooperation is almost a necessity to help address this risk factor. not sure what a proper profit structure should be in these cases.

          Reply
  5. pgl

    The economic know nothings at the various news outlets are telling us inflation is “soaring” even as Mark Zandi is predicting inflation will subside in 2022.

    The political fallout is depressing. Now I get McConnell is going to decry all of this to stop what he calls Biden socialist agenda. But now Manchin wants to stall BBB – even as the scoring of BBB Menzie provided shows it will help economic growth without leading to hyperinflation. And of course the pressure on the FED to raise interest rate mounts.

    Biden came out yesterday to tout the benefits of IIJA and did not avoid the issue of inflation which it seems he is blaming on price gouging. The real motivation of my little rant here was a good interview I just saw with Jared Bernstein. His advice was to pass BBB and do two things on the supply-side – get these supply chain problems resolved and reduce the spread of this damn virus. Maybe the other thing to do is to turn off my damn TV.

    Reply
      1. baffling

        there is a shortage of paper right now. you may not even be able to print that money, either. would that be considered deflationary?

        Reply
  6. ltr

    https://fred.stlouisfed.org/graph/?g=mlWs

    January 15, 2018

    Real Median Weekly Earnings, 2000-2021

    * All full time wage and salary workers

    (Indexed to 2000)

    https://fred.stlouisfed.org/graph/?g=rAbi

    January 15, 2018

    Real Median Weekly Earnings for men and women, * 2000-2021

    * Full time wage and salary workers

    https://fred.stlouisfed.org/graph/?g=muKd

    January 15, 2018

    Real Median Weekly Earnings for White, Black and Hispanic, * 2001-2021

    * Full time wage and salary workers

    Reply
  7. Steven Kopits

    One problem of inflation is that not all wages are rising at the same pace. CPI of 6% does not mean everyone’s wages rose at 6%. Consequently, we can see highly differentiated outcomes within the averages. Those whose wages have repriced recently may be running ahead of inflation; those on fixed incomes or wages agreed, say, one year ago are getting killed.

    Similarly, not all consumers are facing the same cost inflation. Here in rural Massachusetts, most people heat with oil (some with propane), no one with natural gas (we have no natural gas lines). Therefore, we are highly exposed to increased oil prices. Again, people on low wages and fixed incomes are getting killed this winter.

    Reply
      1. Steven Kopits

        I was just front-running you, Joseph, as I was sure you were about to make that comment. Oh, you didn’t make that comment, did you?

        Reply
    1. pgl

      “CPI of 6% does not mean everyone’s wages rose at 6%.”

      Stop the presses! Or should we say thank you Caption Obvious! Readers of this blog have known for a long time that there are relative price changes and that real wages are not a fixed constant. Please pay attention going forward.

      Reply
      1. baffling

        a significant portion of our household income does not go towards consumption, or anything else directly impacted by inflation. in fact, our household gains for every drop in the stock market due to higher inflation, since i can purchase more of those stocks for a given dollar. it is going to take inflation over 6% for a couple of years to have an impact on our household, and that timeline will increase assuming wage increases lift from the floor they have been on over the past decade. there is still greater long term risk from low inflation rather than higher inflation, going forward, at this time. 10 year treasuries do not indicate we have a high inflation problem in the future, they indicate a low inflation problem in the future.

        Reply
    2. Barkley Rosser

      Steven,

      Have you not noticed the recent decline in crude oil prices? Do you think they will start going back up again? Also, Russia increasing natural gas flows to Europe with prices of it falling there, although that market is substantially disconnected from ours.

      Reply
      1. Steven Kopits

        Barkley –

        As I wrote in my February report, ‘Sucker Punch”, which argued that the EIA was substantially under-estimating the risk of high priced oil later in the year (eg, now), the issue is whether OPEC follows a price-led, or volume-led, strategy. The EIA models with a volume-led strategy, ie, that OPEC will pump more oil when the market demands it. However, OPEC follows a price-led strategy, that is, allowing prices to rise and then injecting volumes on that basis. That is quite literally the raison d’etre of a cartel, to restrict production to maximize total revenues. As a result, for the last seven months, OPEC supply has averaged 1.1 mbpd less than the EIA’s earlier expectations. Now, the EIA is anticipating that OPEC will produce 0.4 mbpd more than the EIA’s earlier expectations from November 2021 to December 2022. Is that realistic? I have my doubts.

        US shales can, in principle, increase the pace of production growth. But here’s what Devon CEO Rick Muncrief said about that:

        “As we have stated many times in the past, we have no intention of adding incremental barrels into the market until demand side fundamentals sustainably recover and it becomes evident that OPEC+ spare oil capacity is effectively absorbed by the world market. With this disciplined approach and to sustain our production profile in 2022, we are directionally planning on an upstream capital program in the range of $1.9 to $2.2 billion.”

        In other words, it may make sense for OPEC to hold more than ordinary excess production capacity to maintain discipline on US producers who, let’s be honest, would far prefer high oil prices to more production. Without robust production growth from the Permian, oil prices will tend to head back to $100 / barrel, in my opinion.

        So, we’ll see. The only thing I can say with some confidence is that this whole episode ends ugly, probably very ugly. To wit, my house price has started to fall again*, even as the CPI reached 6.2%. This suggests, as I have stated before, that the surge in M2 is cycling out of assets and into GDP. If that’s the case, then we’ll see both falling assets prices and hefty inflation at the consumer level. As I have said before, whatever the Fed does, it will be from the crucifix.

        Reply
        1. Steven Kopits

          * In the few weeks before Zillow announced its exit from house buying, my house price rose a bit and held steady. A few days after Zillow announced the sale of 2,000 homes, my house price started falling again. Amazing! What a coincidence!

          Oh, and by the way, here is Burry a few minutes ago:

          Cassandra
          @michaeljburry

          The S&P 500’s nominal PE ratio is 26, and Shiller’s CAPE is 39.23. Neither necessary nor sufficient, but S&P’s PE was 18 before 2008-2009’s 58% crash, 20 before 1929-1932’s 80% crash, and 19 before 1973-1975 48% crash. How? Earnings fell 91% in 2008-9, 73% in 29-32, etc.

          https://twitter.com/michaeljburry

          Reply
          1. Barkley Rosser

            Steven,

            I noted this on another thread already before seeing this, So I do hope you note that i have taken you reasonably seriously, if not fully going along with all your arguments, and respecting your knowledge of details of what is happening, even as others here mostly just mock anything you say.

            So, have you noticed that crude oil prices have now declined for the last three weeks while basically nobody in the media has noticed this and we are still hearing all this shouting about energy and gasoline fueling the highest inflation rate in 31 years or so? Yes, this may turn around and those crude oil prices may start their run to $100 by the end of the year. But what has been going on in the last three weeks has not been commented on or recognized by you, although also by almost nobody else out there besides me.

          2. Steven Kopits

            Barkley –

            Oil has held in the $80-84 range for the last month or so. It has not moved much in the last two weeks.

          3. Barkley Rosser

            Steven,

            WTI was over $85 three weeks ago. It is now at $80.79. There has been some wobbling, but it has mostly been downwards.

      2. pgl

        Natural gas is expensive to move across oceans so yea there natural gas market is disconnected from ours. But energy sources are at least imperfect substitutes and oil is not that expensive to transport.

        Reply
  8. ltr

    https://cepr.net/the-trucker-shortage-why-dont-we-let-the-market-work/

    November 11, 2021

    The Trucker Shortage: Why Don’t We Let the Market Work?
    By DEAN BAKER

    I wanted to say a bit more about the New York Times piece * on the shortage of truck drivers and how this is the biggest factor causing the current supply chain problems. In an earlier post, ** I pointed out that the real hourly wage for truckers has dropped by more than 5 percent since 1990. If we are wondering why there is a shortage of drivers, this would be an obvious place to start.

    But the drop in pay is just part of the story. The industry is far less unionized than it was back in the 1970s, when President Carter began to deregulate trucking.

    Not having a union means that truckers have far less control over their working conditions. That’s a big deal in trucking. Without a union to stand behind them, truckers can be forced to work irregular shifts and long hours. They can be forced to drive in all sorts of weather. The can also be forced to drive trucks that they don’t think are safe due to bad brakes or other issues.

    In addition, there has been an enormous increase in the number of independent truckers who own their trucks. For the most part, these should not be thought of as being small businesses, but rather like Uber or Lyft drivers. The large shipping companies contract with these drivers and control almost everything about their work conditions. This can mean that they require them to wait, often many hours, for a shipment to unload and then be transported to a store or warehouse.

    Since a contract will typically pay by the mile, if the time spent waiting is factored into the equation, the hourly pay for these drivers will often be very low, possibly even less than the minimum wage. That doesn’t matter however, since these truckers are classified as independent contractors, not employees. This means that the minimum wage does not apply to them, nor are they eligible for unemployment benefits if they can’t find work, or workers’ compensation if they are injured on the job.

    In short, trucking doesn’t look like a very lucrative occupation these days. It’s not surprising that workers are not lining up for the job.

    But this problem comes with an obvious solution. Employers have to pay higher wages and offer better working conditions. (There also is a huge issue with sexism, less than 10 percent of truckers are women.)

    For some reason, this solution does not feature prominently in the article….

    * https://www.nytimes.com/2021/11/09/us/politics/trucker-shortage-supply-chain.html

    ** https://cepr.net/hot-tip-for-nyt-real-average-hourly-wages-for-truckers-are-down-five-percent-since-1990-might-affect-driver-shortage/

    Reply
    1. pgl

      As one of your FRED graphs have noted – real compensation for truckers have fallen by a lot more than 5% since Jimmy Carter was President. Now the market solution to any alleged driver shortage is rather obvious – pay them more.

      Reply
      1. Steven Kopits

        So why wouldn’t you pay them more? Perhaps because there’s a budget constraint. The employer has to raise its prices before paying more to truckers. With an unexpected surge of inflation, employers may not appreciate that they can charge more to their customers. On the other hand, if they have longer term frame contracts, then they have an incentive not to hire more truck drivers.

        Reply
        1. baffling

          “So why wouldn’t you pay them more? Perhaps because there’s a budget constraint. ”
          employer pay and poor working conditions are not new in trucking. it has been ongoing for a long time. as has the “shortage” of truckers. what it means is that the current trucking business model does not seem to be working.

          Reply
  9. joseph

    JohnH: “While nominal compensation has grown faster in some sectors relative to its pre-pandemic trend, real compensation growth has been below trend in all sectors apart from leisure and hospitality.”

    Keep in mind that there are compositional effects at work here. Remember last year when everyone was remarking on the fact that average wages were going up during the pandemic. That was because lower wage workers were the first to be laid off which increased the average wage of those remaining.

    Now you have the opposite effect going on. Lower wage workers are being hired back by the millions which has the effect of lowering the average wage of the aggregate.

    So while it is true that aggregate wages may not be keeping up entirely with inflation, the situation is likely not as extreme as some are making it out to be. To some extent it is an artifact of a compositional change in the aggregate.

    Reply
  10. rsm

    《(Aside: Is there a standard error for the estimate of average wages? The technical notes regarding average hourly earnings series indicates: “Average hourly earnings estimates are derived by dividing the estimated industry payroll by the corresponding paid hours.” In other words, the average hourly wage is not calculated by surveying a number of employees to obtain their earnings per hour, and then averaging over all the observed earnings per hour. Hence, there is not a standard error in the sense one might expect. )》

    Did all economists flunk Reading Comprehension 101? What about “earnings estimates” and “estimated industry payroll” doesn’t mean they did surveys, right?

    Reply
  11. rsm

    First sentence from the linked technical note:

    《The earnings series presented in this release are
    derived from the Bureau of Labor Statistics’ Current
    Employment Statistics (CES) survey, a monthly
    establishment survey of employment, payroll, and hours. 》

    Hello? Reading Comprehension, we have a problem?

    Reply
    1. Menzie Chinn Post author

      rsm: Look, they estimate one big number – total wage bill. They divide by one big estimated number – estimated hours. There’s a standard deviation of sample in there, but standard error – well not the one you’re thinking of…

      Reply

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