One key metric used to measure the health of the economy is the status of “nominal wages.” That’s simply money wages, the face value of what a worker is paid. These do not take into account inflation. In nominal terms, $15 an hour is $15 even if today that amount can only buy about two-thirds of what it could 20 years years ago.
Factoring inflation in gives us “real wages,” that is, the measure of what they will buy. But both “nominal” and “real” wage measures provide valuable insight in what’s happening, particularly in the short run when inflation is rarely a big factor in eroding purchasing power.
Since the Great Recession and its immediate aftermath when both nominal and real wages fell, we’ve seen an annual rise in nominal wages that has barely kept up with inflation. That showed true once again Friday when the Bureau of Labor Affairs included average nominal wages in its monthly jobs report. The average increase from December 2016 to December 2017, the BLS noted, was 65 cents, 2.5 percent. But inflation was 1.7 percent, an historically low rate. Nonetheless, it was enough to obliterate nearly 70 percent of the purchasing power of that paltry nominal wage increase.
Elise Gould at the Economic Policy Institute notes:
Year-over-year nominal hourly wages grew at 2.5 percent in December. The figure below shows nominal wage growth over the last 10 years. Wage growth remains below levels consistent with the Fed’s target inflation rate and trend productivity growth, and is simply not putting worrisome upward pressure on inflation. The labor market—and surely the workers in it—can withstand stronger wage growth for a sustained period of time. Wages will rise faster when employers need to compete more for workers, rather than the other way around.