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Prices and Wages
Consumer Prices versus
Average Hourly Earnings
Update March 11, 2007
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Real Average Hourly Earnings remained
essentially flat for January 2007. The The average hourly wage for private sector,
non-supervisory workers in January was $17.09. For a 40-hour week, this wage
works out to about $35,547 per year. Average Hourly Earnings are those wages
earned by non-supervisory personnel working in the private sector. To get an idea what a living wage is for
families living in different places within the Graph 1: Consumer Price Index vs. Average
Hourly Earnings (Percent Change). When the blue line (AHE) is higher than the
red line (CPI), workers' earnings are rising faster than prices. When the red
line is above the blue, workers' earnings are not keeping up with rising
prices. The orange areas represent periods of eroding real wages, while the
light blue areas are periods of real wage gains.
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Real Average Hourly Earnings are corrected
for inflation, as follows:
Average Hourly Earnings - Consumer Price
Index = Real Average Hourly Earnings.
Prices are More Volatile Than Wages
One thing obvious thing the graph shows us is
the contrast between the low variability in wages (blue line) compared the much
more volatile changes in prices (red line). Employers exercise their option to
raise and lower prices but try to limit changes in wages to what is allowed for
under their business plan. Changes in costs of key "commodities",
such as energy, food, and financing, and taxes are often followed by similar
hikes in the prices for company goods and services.
The pay that employees receive does not
closely track changes in prices, hence the lower volatility of earnings
compared to prices. In this situation, workers are shouldering the burden of
price hikes, which are not matched by increases in wages. In order to carry
themselves and their families through periods of higher inflation, the worker
can do one of three things:
1. Buy less goods and services, that is, belt
tightening;
2. Dip into savings to cover higher costs due
to inflation and hope to make up the savings when wages increase later on;
3. Use credit cards to make up the shortfall
between earnings and price hikes.
Clearly, as Americans carry about $800
billion in credit card debt, option 3 is popular. What this means is that
inflation not matched by the same increase in wages hits the worker's wallet
twice: once at the time of purchase, and again later when credit card interest
is applied. The worker is purchasing two items now, instead of one: the item,
plus the cost of borrowing with a credit card. Nationwide, this kind of
unhealthy economic practices is measured as an increase in GDP - generally
thought to be a good thing..
Employers can manage the cost of labor through
simply not offering higher wages, or, through contracts, where workers
organized into unions agree to work a certain period of time for an agreed upon
package of wages and benefits. What if there were such a thing as
"consumer contracts?" The idea would be for consumers to band
together and negotiate with food producers, grocery stores, gas stations, and
even medical providers to iron out contracts whereby the consumer would get
goods and services at a specified cost over a specified period of time. This
would eliminate the price shocks that contribute to rising credit card debt and
make businesses share the burden of sharp changes in costs of commodities.
Significance of Katrina and the 2006
Election
Experts and government officials attributed
September 2005's big rise in inflation to hurricanes Katrina and Rita.
Evidently, loss of refinery capacity pushed up fuel prices, which ultimately
raised the cost of doing most every other kind of business. Prices did fall
sharply after the hurricane spike, but jumped again in January 2006. Falling
gasoline prices, especially since August 2006, have accounted for substantial
increases in Real Average Hourly Earnings. But in December, rising prices rose
as much as wages, for the first time since July 2006.
Whether by design, or by coincidence, the
period leading up to the November 2006 election saw data favorable to workers,
that is, wages rose faster than inflation over several months. Following the
election, changes in prices and wages have basically risen at the same rate.
Significance of State Decisions to Raise
the Minimum Wage
Seven states have raised their minimum wages
in 2006. Those states include Maryland, Maine, Rhode Island, Michigan,
Arkansas, West Virginia and Ohio. The effect of raising minimum wage certainly
has some effect on the improving earnings over the past six months, including
the period leading up to the November 2006 election. Raising the minimum wage
has been a major plank in the Democratic Party platform, and was passed by the
U.S. Congress in January, 2007.
Stocks
For those who own stocks, Robert W. Colby of
Colby Research offers his current assessment of the stock market. You'll
find an interesting array of data and indices, and cautionary advice, including
the definition of "bearish divergence." Mr. Colby speaks frankly
about the effects of war on the economy, and particularly stocks and
bonds.
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