Wages really are growing faster than inflation. By Matthew Yglesias

www.slowboring.com

Wages really are growing faster than inflation

By Matthew Yglesias

11 - 13 minutes

It didn’t attract a ton of attention, but May of 2023 marked the first month since March of 2021 that annual wages rose faster over the past year than average prices, and it feels like a big deal to me.

Macroeconomists and central bank staffers have their reasons for downplaying the significance of this, which we’ll get to later. But for most people, I think the difference between “full employment but wages are falling” and “full employment, falling inequality, and rising average wages” is a meaningful one. In fact, I’d say the delta between wages and inflation is a much bigger deal than the rate of inflation itself.

This is great news for the American people.

But good news for America is bad news for people who have totally unrelated objections to Joe Biden — if you want tax cuts for the rich, acquiescence to Russian conquest of Ukraine, or more restrictions on abortion, or maybe you just really hate elective pronouns, you don’t want Americans to feel better about the economic situation. That means it’s not only boom times for factory construction but boom times for claims that economic data is fake.

I had hoped that after the whole internet explained why Balaji Srinivasan and David Sacks were wrong about the BLS jobs reports, conspiracy theories would tamp down. Unfortunately, the reverse has happened.

Dr. Benjamin Braddock recently asserted that official economic data is “all completely fake,” and Elon Musk, who as proprietor of Twitter has nontrivial influence over the global distribution of news and information, seemed to agree.

I want to reiterate that this is an extremely strong, and totally wrong, claim.

It’s not challenging to find examples of the official data having flaws, needing revisions, not precisely capturing the underlying dynamics, or relying on debatable methodology. But the claim that the data is “fake” is totally off-base. It’s also worth saying that there’s nothing new about the fact that the economy is imperfectly measured — data released during Donald Trump’s administration was also imprecise and subject to revision.

It’s worth noting, though, we are talking about a range of data from different sources. The unemployment rate is based on a broad survey of the whole population, the official jobs numbers come from a special survey of employers, and we also have administrative data on things like Unemployment Insurance claims. They all say roughly the same thing, namely that labor demand has cooled over the past year but the labor market remains robust. This is also the point about the alleged rise in layoffs, which reflects a rise from an unusually low level of layoffs to a more normal level of layoffs.

Meanwhile, as actual inflation falls, we are seeing a resurgence of claims that inflation is being badly mismeasured and we really ought to be using a different data series, published by Shadowstats, to uncover the true inflation rate.

Shadowstats is a surprisingly persistent con run by a guy named John Williams. The Bureau of Labor Statistics changed its methodology in the 1980s, and Williams says that he gets his different numbers by applying the old methodology to newer data. It’s an intriguing idea, but as Tim Lee has explained, he’s just lying and not actually doing that.

I really recommend reading Tim’s piece, which is diligently reported and thoroughly convincing. It includes a conversation that Tim had with Williams on the phone, in which he points out that according to Williams, prices rose six-fold between 2000 and 2021, and asks him to name some specific things that have gone up in price that much.

    “If you get a suit off a rack in Sears Roebuck as opposed to going to a tailor, that suit's going to be a lot more expensive,” Williams told me. “If through redefinitions over time they bring down the cost of the suit, using cheaper cloth, you no longer get it made by the tailor, you'll find that the cost of that comes down.”

    I’m sure some products have declined in quality over time, but I couldn’t believe that would explain a six-fold rise in the measured price level. So I asked him, again, to name some products that are six times more expensive than they were in 2000.

    “I'm sure I can do that,” he said. “It would probably be in the food area. I don't have the time to get into it right now.”

    I asked the same question a third time later in our conversation.

    “I can't give you a real hard example—this item here is six times more expensive than it was then because it's just a straight sticker price,” he told me. “They're looking at a sticker price in one circumstance and then if the quality is being reduced, that's inflation.”

I happen to think food is an unusually terrible example to claim here, because the price of agricultural commodities is unusually unambiguous. Beef is five times as expensive as it was in 2000, the price of eggs has gone up 250%, and rice has doubled. Milk is about 50% more expensive than it was back then. I’m sure you can find something that’s gone up 6x, but it’s definitely not food in general. You can even verify, if you care to, that food spending as a share of personal income has fallen over time, even though people eat out a lot more than they used to.

The reason Williams can’t name anything specific is that, as Tim explains in the post, Williams isn’t actually using the old BLS methodology at all. He read a BLS report explaining that methodological changes have pushed the price level down by 5.1 percentage points over the past 40 years and then chose to interpret that as a 5.1 percent divergence per year. Williams then persists in publishing incorrect information, even though it’s been repeatedly pointed out that he’s lying.

Predicting the future is challenging. But I think there is reason to believe that the return of real wage growth isn’t going to be a one-month blip. One reason to believe that, based on a general forecasting principle, is that real wage growth is normally positive. The recent stretch of prices growing faster than wages was unusual across the history of the United States, so all I’m really forecasting here is a return to normal.

Delving into specifics, you can look at sectors of the economy where domestic wages are not a major driver of prices. On oil, for example, the American oil industry has now recovered from the blows it took during the pandemic, and crude is pumping at roughly the highest rate on record. This doesn’t mean we’re going to get back to the super-cheap oil of 2015, but it means large upward spikes are unlikely.

The number of H-2A temporary farm workers is increasing, as this is one area of immigration policy where Biden is aligned with many congressional Republicans. As with oil, that’s not a guarantee that we won’t see price spikes in agricultural commodities, but it makes them relatively unlikely. Average rents are poised to start declining, based on what we see in the spot market. And what’s particularly exciting about the housing market is that new construction is continuing at a healthy pace.

None of this means that the Fed is “out of the woods” on inflation. There are huge swathes of the economy — restaurants, child care, retail — where wages do tend to directly pass through into prices, so as long as nominal wages are growing at 4-5%, it’s very hard to see how overall inflation can get down to 2%. Some people are declaring a premature win here, and I think it’s important to have more realistic expectations.

But I do question how much purely wage-driven inflation really matters, as long as it’s not spiraling upwards. If burritos are getting more expensive because of bad rice and wheat harvests, that means everyone’s getting poorer. If burrito prices are rising at the exact rate of increase in the wages of burrito rollers, that’s an egalitarian economy that lays the groundwork for broadly shared prosperity. I’ve talked a few times about research from David Autor and Arin Dube showing that nominal wages are growing faster at the 10th percentile than at the 50th and faster at the 50th than at the 90th. The problem with their chart, from both a political propaganda and a realistic point of view, is their data shows that wages at the 50th percentile have been rising slower than inflation, so the chart is an overall bad news story. But now that a more benign inflation environment means wages are growing faster than inflation at all three of those points, you have an emerging picture of a Bidenomics success story — wage growth paired with wage compression, with the biggest gains for the poorest workers. That’s Morning in America, as Ronald Reagan said, even if progress on bringing core inflation back down to 2% takes longer.

Musk keeps insisting that the government is lying about economic data, that “deflation is coming,” and that the Fed should not only stop raising interest rates, it ought to turn around and cut them.

Not coincidentally, high interest rates are bad for Musk personally because they increase the cost of Twitter’s debt service and weigh on the price of Tesla stock.

More broadly, though, congressional Republicans who used to be obsessed with blaming Biden for high commodity prices have largely lost interest in the cost of living topic now that things have improved. Good news for America is bad news for them. Instead, they’re fighting about impeaching Biden and trying to find ways to un-impeach Donald Trump, while on a policy level, they are pushing to increase the budget deficit with a regressive tax cut.

This is not a very flattering policy choice for them. Looking at an emerging status quo of egalitarian growth that’s somewhat uncomfortably inflationary, Republicans have ideas to make it less egalitarian and more inflationary. That’s not a good look for them any more than a billionaire electric car magnate whining that strong wage growth is leading to higher interest rates (which is bad for the price of speculative stocks). I would say the best political tactic Republicans have in an improving economic environment is to try to change the subject to fights about NCAA women’s sports. But the economy is always a story, and it’s been a bad story for Biden for most of his presidency. That’s changing now, and it means a booming market for conspiracy theories about the government cooking the books.

Some of that is bad faith and dishonesty; some of it is sincerely mistaken.

But I think a lot of it is that even though right-of-center people are acutely aware of how groupthink and coalition politics have undermined epistemic rigor on the left, they don’t remotely practice what they preach. Various businessmen who have various reasons to situate themselves politically on the right spout off, and conservatives who actually understand economics and public policy don’t want to fight with them. Even if they did, conservative media doesn’t want to inform its audience. For now, it’s all oppositional politics, and it’s easier for everyone to work together toward the greater goal of beating Joe Biden. But it would be incredibly damaging to the economy to attempt to govern based on this unholy mishmash of ideas.