June 6, 2012

Chart Du Jour: Wage Growth and Business Cycle

By James Picerno of The Capital Speculator 

The relationship between real (inflation-adjusted) wages and the business cycle is “inconclusive,” a recent study reminds. For example, the empirical literature “finds that the wages of newly hired workers are more cyclical than wages of workers in ongoing employment relationships,” notes a 2010 paper from the Federal Reserve Bank of Richmond. But if you’re inclined to see a procyclical link between wage growth and the economy generally, Friday’s income and spending update for April holds out the possibility that all’s not yet lost for expecting growth.


Private-sector wage growth inched higher in April, enough at least to raise the year-over-year percentage change to 4.1%, or slightly above the 3.9% annual pace in March in nominal terms. The annual pace of real wage growth also perked higher in April. Is this a sign of economic strength that will help carry us through what looks set to be a turbulent summer? Or is April's pop in wage growth the last gasp of an economy that's struggling (and failing?) to digest a world full of hazards?


If real wages have any influence on recession risk, perhaps it’s no small advantage that inflation-adjusted wage growth was 1.8% for the year through April. That’s a bit more than twice the rate in December 2007, when the economy peaked just ahead of the Great Recession. A small edge, perhaps, but if rising wages can help keep a new contraction at bay, the April numbers are a small bright spot.

Nonetheless, there are plenty of reasons to be cautious. For one thing, April data now looks ancient in the wake of Friday’s discouraging employment report for May. We'll have to wait a month to find out how wages fared in May. Of course, by that time there's a good chance that there'll be a lot less cyclical mystery otherwise, for good or ill.

About the Author - James Picerno is a veteran financial journalist since the early 1990s at Bloomberg, Dow Jones, etc. before becoming an independent writer/analyst/consultant in 2008.  James is also the author of Dynamic Asset Allocation (Bloomberg Financial, 2010) and he writes at The Capital Speculator(EconMatters author archive here)


The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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