The Real Wage Rate

This is another problem for the Bush Administration. Since the start of 2005 the real wage rate has been declining and in the last two months the real wage has dipped below its November 2001 level. In other words, the real wage (the hourly wage put out by the BLS adjusted for inflation) is lower now than it was 4 years ago.

[Note on the Graph: The Benchmark line represents the November 2001 wage]

What is the most likely reason for this decline? My guess is the increase in gasoline and other prices. Energy prices comprise a very important part of the CPI and can usually account for a large chunk of many increases. If one were to look at the change in the CPI less energy the changes are very modest (around 0.1%/month), but in looking at the CPI that includes energy items and the changes are much larger (5 to 6 times as large). Further, compounding to an annual rate for the last three months the percentage increase is 89%.

Now this isn’t something that Bush or any President has much control over. I’m pretty sure that every President, if they had one, would wave a magic wand over the economy and keep energy prices low and thus, help ensure that real wage rates were not eroded over time. While one could argue that recent increases in gasoline prices are in part due to the conflict in Iraq, I don’t think that is all of it. There is a great deal of speculation that the Saudi fields are peaking and starting on the downward portion of their production curve. Production from U.S. fields has been in decline for years, and usage shows few signs of diminishing. Add on top of this that right now the alternatives to the internal combustion engine aren’t ready for large scale use as well as the turmoil in the Middle East and Iraq in particular and you have all you need for high gasoline/oil prices. Then throw in a couple of strong hurricanes in the Gulf of Mexico and things can look rather depressing for the worker who earns an hourly wage.

Still this is a problem for the Bush Administration since people have now come to expect the President to do something about their living standards. So the President or his press secretary is going to go into the Rose Garden and talk about how wonderful the economy is. Every little bit of good economic news, no matter how trivial, will be trumpeted and linked to the President’s policies. This is standard operating procedure for Presidents (yes, all of them). The reason they do this is because in reality President’s have little control over things like the real wage…after all, what President can control Hurricane’s and Sauid oil field production?

FILED UNDER: Economics and Business, Middle East, , , , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.


  1. odograph says:

    We tried, half-heartedly, to prepare for this day. CAFE, “light truck” loophole, etc.

    Of course, there probably was a technological limit. We might have moved from a 20 mpg fleet average to maybe 30 mpg on average. That would mean that the average person would be getting 50% less bite from the higher prices.

    There are some neat technologies for energy efficiency, but they don’t market well. It’s too bad, because the later in the game the harder it is to make an impact.

  2. Bithead says:

    No, Odo… since youv’e decided to campaign for the Prius… they don’t market well because in the real world, they don’t WORK well. Even with more expensive fuel, we’re paying more for the hybrid, for example, than we’ll ever get back on fuel cost savings from it.

    And even without that stipulation, it doesn’t add up. Explain to me, for example how a hybrid drive will work for this situation.

    The bottom line, is, it can’t.

    The message? Quit trying to mandate gas milage. It doesn’t work, and ends up costing us more than we save.

  3. ellen says:

    OK there is inflation and price inflation.

    This president has definitely done a lot to increase the former. Deficits increase money supply (increased money supply is inflation,) and in this case the money mostly flows in from overseas.

    Price inflation is also probably significantly understated. There is substitution and health care is weighed at 6% rather than it’s real cost of 3 times that.

    Since Bush supporters have laid so much stress on the “Bush economic miracle” and mocked legitimate concerns (look at Kudlow sometime for the the rah rah) this administration is going to get hit if the economy goes south.

    Reappointing “Bubbles” Greenspan was also the president’s responsibility and will prove to be a mistake if real estate crashes. Even while interest rates have increased the fed increases money supply and now proposes to stop reporting M3.

  4. DL says:

    One word-ANWR!

  5. odograph says:

    Bit – Explain to me why you need a hybrid to get 30 mpg? Doesn’t the GM Opel Tigra get like 60 mpg highway?

    I actually think hybrids work, but I don’t need them to argue for “preparedness.”

  6. odograph says:

    BTW, there’s no reason a democracy has to be “prepared” for anything, but when you are not prepared you automatically accept the consequences.