Real wages have risen in America and are falling back in Europe
Na lot the unification of the world these days. But there is one sentiment shared by many people, regardless of nationality: pessimism about the economy. Just one in ten Americans think they are better off than they were a year ago, according to a recent poll The Economist by YouGov. The same negativity appears in surveys elsewhere.
Such gluttony continues in America despite the incredible performance of its economy: real wages for workers are significantly higher than before the covid-19 pandemic – even after controlling on the inflation. Those on low incomes have done particularly well, benefiting from tight labor markets from 2021.
The average weekly earnings of the nation’s workers reached nearly $1,170 in October, up about 3% in real terms since the end of 2019. The bottom quarter of earners has seen an average annual nominal wage increase of 5.6% each year since the start 2020, compared to 3.8% for the highest quarter, according to figures compiled by the Federal Reserve Bank of Atlanta.
As ever with economic data, it is possible to tell different stories. Much depends on the choice of foundation. Incomes rose early in the pandemic on the back of massive government handouts. Compared to that hard time, real income is lower today. The choice of deflator is also important. The oft-cited consumer price index overstates how much inflation erodes wages because it does not capture how people change spending patterns amid rapid price increases.
Like the American economy, Great Britain has produced growth in real wages despite the pandemic: inflation-adjusted wages were 1.5% higher than at the end of 2019. As in other countries, there is also a clear place at the lower end of the job market. A 9.7% increase in the minimum wage this year and another 9.8% increase scheduled for next year helps explain that. But official figures may overstate the increase, as other sources, such as tax receipts, point to slightly weaker growth. Furthermore, over a longer time horizon, real wages are still 4.7% below their peak, which was reached in February 2008. The government’s forecasting office believes that wages will not recover. that is until 2028.
The effects of a tight labor market will take longer to show in Europe, as most of the continent’s workers are paid by collective bargaining agreements. These tend to run for a year or more, and do not respond quickly to inflation. So real wages under collective bargaining agreements in the euro zone fell by 5.2% last year as inflation hit.
But since then wage agreements have increased. In the Netherlands, which has some of the most recent figures in Europe, annual growth in agreed wages has reached 6% this year, even as inflation has fallen to zero. As inflation falls elsewhere too, and new agreements come into force, real wages are likely to rise further. In Germany, for example, federal government workers will receive a nominal wage increase of as much as 16.9% next year, with the highest increases going to the lowest paid.■
For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter.