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Real Wages Continue to Fall

Posted by: Michael Mandel on November 03

Last week the employment cost index for the third quarter was released by the BLS. It showed that real wages and salaries dropped by an astonishing 1.8% in the third quarter compared to a year earlier(not a number you will find reported anywhere else in the news media, as far as I know). That’s one of the quarterly declines on record.

In fact, real wages and salaries peaked in 2003, and have been trending downwards since then. I consider this to be an absolute critical fact in understanding the current financial crisis. In fact, Americans were borrowing so heavily because their real wages were declining.

And no one has escaped. Here is a table which shows the decline in real wages by occupational category since 2003.

change in real wages
All civilian workers -2.4%
management, business, and financial -3.5%
professional and related -0.7%
sales -4.6%
office and administrative support -2.1%
construction, extraction, farming -0.9%
installation, maintenance, repair -3.1%
production -4.2%
transportation -4.1%
service occupations -2.4%
Data: BLS (based on employment cost index)

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Reader Comments


November 3, 2008 10:55 PM

No,Mike,Americans borrowed so heavily because they could.It would have been infinitely better to have gradually adjusted our standard of living down to the real wage level,as it occured,rather than to maintain a higher standard of living thru borrowing,as we did.Now the adjustment we have to make is large and it comes all at once,creating havoc in financial markets and countries all around the world.It is just as bad for countries who got used to exporting to us,suddenly losing their export market.I blame the FED for keeping interest rates too low for too long after the dotcom bust and the politicians for not having the backbone to gradually shifting taxes onto consumption and away from savings and investing,as our trade deficit started to grow.

Joe Cushing

November 3, 2008 11:12 PM

Wow, You'd think the mainstream media would be all over this. This is big ammo for democrats. Too bad they lump construction in with farming and extraction. I bet there is a big spread there. I bet farming and extraction wages are up and construction wages are the pits.

It's interesting that sales has taken such a hit. Was most of that in the last few months?

Keith G

November 4, 2008 11:39 AM

Here's the problem I have with this data. If you go to the BEA and download "Wage and Salary Disbursements", chain it with CPI = 100 in 1999(BLS), and then divide by the number of workers in the workforce (also BLS) you get the following:

$5,200B / 1.08 / 138.273M = $34,824 in 2003-IV


$6,623B / 1.26 / 145.517M = $36,148 in 2008-III

What's in the BEA numbers that's not in the BLS numbers? Could the demographics of the workforce be skewing the data? As workers get older they tend to make more. Any ideas?


November 4, 2008 12:02 PM

If you think the numbers are bad, wait until all the domestic auto makers fail. Then even nominal wages will fall.

Mike Mandel

November 4, 2008 12:32 PM

That number is distorted by the extreme earnings of the people at the top of the income distribution. This number includes stock options, which counts as wage and salary compensation. There's no doubt that people at the top--including people with advanced degrees--have done better.

Mike Mandel

November 4, 2008 12:34 PM

Viking, in hindsight, you are right. At the time...or certainly in the earlier makes sense to continue your consumption, under the assumption that the fall is just a blip. At some point, though, it would have made sense to adjust downwards.


November 4, 2008 06:08 PM

US wages will stay flat, at best, until China's per-capita GDP is about half that of the OECD (so until 2015-17).

Wages in China and India, since 2003, have probably risen 40-50%.

Both trends (OECD down, India/China up) will continue until the delta is somewhat smaller.

Overall, this is good for humanity.

Joe Cushing

November 4, 2008 11:32 PM

One thing missing from this also, is the real impact of the change in housing prices on income. I would argue that if you own a house and never plan to own a different kind of house, the effect is 0. This is because you are always going to need a place to live, so you can never realize the income until you are dead.

If you don't own a house or plan to make a move to a more or less expensive kind of house or location, the effect of price changes is quite large. If you don't own a house and prices go up, that is the same as inflation without a wage increase--or a real wage decrease. If you own a house in California and plan to move to Texas in the future without ever moving back, you can see great income from your home. If you are like many people, you own a house but aspire to buy a larger one, the effect is similar to not owning a house but reduced.

Unfortunately many people saw all unrealized gains as income. These people didn't think of the fact that they were always going to need a place to live and that their real wealth in terms of property they can buy, never changes with price.

Oh, one exception to my rule about not realizing gains until death. People who take out reverse mortgages can spend the income from appreciation without negative effects. This only works though because it is a plan to die and no longer use any house.


November 5, 2008 05:57 AM

Could falling real wages be an indication that globalisation has operated too quicky? On An important question now might be: Can the positive aspects of globalisation be saved or are we headed towards an inevitable and destructive closing down of the flows of knowledge and trade?

Marco Montini

November 5, 2008 01:46 PM

Interesting. Only one comment. According to basic Keynsian Consumption, once a level of income and consumption have been attained, the consumer tends to maintain a large portion of the consumption previously enjoyed even in the face of relatively large income declines. Essentially, Keynes expected the consumer to borrow heavily in order to maintain consumption when income declines substantially within the short run. My understanding is that, in the long run, consumption patterns move along with income patterns.


November 6, 2008 06:11 AM

Viking, please read Marco's comment - I'm a middle aged debt-rat (rat running in a wheel to service debt) and I think what he says makes absolute sense. Over the past decade I didn't make the immediate connection between "real income" and lifestyle (like the weekly restaurant meal with the family) and actually refinanced with a line of credit based on home equity. Sure, I'm not in over my head at this point, but I can absolutely understand how it can happen to people. Kartik, you're stock market tips look a bit crappy, but I think you are right to say that a bit more equality between the developed and developing world is fundamentally good. The more people we have educated the better off I think we'll all be. Joe - very sensible.
BTW, I work with a single 25 yo who is convinced we are heading towards another major world war. I hope the ability to communicate over internet to people of good will may avert what seems a historical possibility.
BTW - congratulations to the USA on the election of your new president. Even down here in Oz we are feeling like we are part of a major turning point in history. Let's hope we can make today's kids and their kids proud of us.

Mike Mandel

November 7, 2008 12:37 PM

Rycoka--I think we're heading for a tough period for globalization. The monetary flows don't make sense unless the U.S. has something to export.


November 11, 2008 11:27 AM

Kartik, I hate to say it, but in this you might be right.

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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