Why Falling Wages Are Good News for Jobs (Seriously!)

Paychecks aren't keeping up with inflation. That's bad news for families, but good news for the job market.

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Shutterstock / Milos Luzanin

America's labor market is running a fever.

For the past year, real wages for U.S. workers have been on a downslide. They're not collapsing, but they are falling. Since February 2011, average hourly wages have shrunk 1.1 percent when adjusted for inflation (in nominal terms -- what workers actually see on their pay stubs -- they've risen). Total weekly pay is down by a slightly smaller margin, 0.4 percent, because employees are working more hours.

This is a painful situation for families. It means that paychecks are lagging behind the cost of living. And because the official measure of inflation does not include energy or food prices, it also means most households are having to work even harder to make ends meet than the real wage data would suggest.

But just like a fever is a sign that your body is fighting off an infection, the drop in workers' pay may be a sign that our job market is on the mend.

The graph below charts out real wage growth since 2006. Notice the giant spike which occurred towards the end of 2008. That was a sign of just how distorted the labor market became in the wake of the financial crisis. Nominal wages rose even as the economy went into free-fall, taking the inflation rate with it. Then they kept on rising, even as inflation fell below zero in 2009. 

Average_Hourly_Wages.png

In short: during the recession, millions of workers were laid off, but those who kept their jobs didn't take pay cuts. Wages grew faster than the price of goods, making it harder for companies to employ new workers. 

Now we're seeing the correction. Yes, it's evidence that, even with recent job growth, we're still in an employer's market, and it will be hard for workers to bargain up their salaries for some time. And yes, it'll be painful on the pocketbook. But as prices rise compared to the cost of employing a new worker, it means more companies will be in a position to hire. And when hiring picks up enough, the fever will break. 

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Jordan Weissmann is a senior associate editor at The Atlantic.

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