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April 12, 2005
Pay Increases Lag Behind Inflation

Wages fell for the average worker in 2004 after adjustment for inflation, the first decline in nearly a decade, the New York Times reports.

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In 2004, inflation-adjusted wages, or real wages, dropped 0.5 percent among nonsupervisory workers in the private sector, according to the Bureau of Labor Statistics.

The fall in real wages occurred even as the economy saw gains in employment and productivity.

"Pay increases are not rebounding, even though the factors normally associated with higher pay have rebounded," says Peter LeBlanc of Sibson Consulting.

For now, the average worker is seeing bigger increases in consumer prices than in wages. While some observers are concerned that the trend could be a long-term one, others say it is only a short-term problem.

"What we're seeing now is not atypical; employers can't pay the wage bill to keep up with the oil price increase," says Allan H. Meltzer, an economist at Carnegie Mellon University. "I think the long-term trend will be that wages will right themselves and look like productivity growth on average."

The newspaper reports that a bigger gap has developed between productivity gains and wage increases since 2001. In that period, compensation rose about one-third as fast as productivity, according to the newspaper. Over the previous seven business cycles, including the boom of the late 1990s, compensation rose about three-fourths as fast as productivity.

"To produce real wage gains now, it takes sustaining a very tight labor market," says Thomas A. Kochan, an economist at the Massachusetts Institute of Technology. "Without that, we're going to continue to see what we're seeing now: abysmal growth in real wages."

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