Wages, Inflation, and the 2003 Tax Cut

Jeremy Peters dusts off the fear of rising wages card:

The other wild card is labor costs. Economists cautioned that rising wages could pressure businesses to raise prices in the months ahead. “People have been expressing a lot of relief over declining energy prices while seeming to neglect the rise in labor costs,” Richard F. Moody, chief economist with Mission Residential, a real estate investment firm. “Now with oil over $60 a barrel, it looks like it could be both energy costs and labor costs.” For the first time in four years, wages are significantly outpacing inflation. A separate Labor Department report yesterday showed that while wage gains have slowed slightly in the last month, workers are still enjoying the strongest buying power in years. When adjusted for inflation, the average hourly wage of a worker in a position below management level rose 2.3 percent.

Here we go again. What to say? Oh yea, let’s have Dean Baker step up to the microphone:

Real wages have risen less than 2 percent over the last five years. Because of the sharp drop in gas prices over the last four months, real wages have grown rapidly over this period. Of course, once oil prices stop falling (as they already have) real wages will be growing in the range of 1.0-1.5 percent annually, well below the 2.7 percent rate of productivity growth of the last five years. Since real wage growth is clearly trailing productivity growth, why are reporters so obsessed with the idea that wage growth is causing inflation?

While real wages have risen by less than 2% over the past 2 year, almost all of that increase occurred in 2002 and 2003 as we pointed out here and here.

Given the National Review cheerleading about how great the 2003 tax cut was (see for example the latest from Fuzzcharts, I wish they’d explain why real wage growth is essentially zero if the economy is so wonderful. Real wage growth between the two tax cuts (the National Review crowd now claim they opposed the 2001 tax cut – ha, ha, ha) was stronger than it has been since the anointed supply-side miracle. OK, employment was falling between the two tax cuts. But I do seem to recall the National Review pundits predicting a great recovery if Congress passed Bush’s first tax cut.