If you’ve ever been completely lost—no GPS, off the map, in any direction lost—you know how confusing it can be. Suddenly, nothing feels familiar and every available track seems to be the right one. It may take some time to find your bearings and get back on track.
In its own way, the economy has been off the map for the past three years. Standard gauges look good. Inflation was a concern, but production was strong and the job market was hot. The unemployment rate fell below 5 percent in September 2021 and He never looked back.
But public opinion is another matter entirely. American respondents are regularly asked how they think the economy is doing, and whether it is getting better or worse. Both measures have skewed downward since late 2020 and caused a hole in the past year. Almost everything is amazing – and no one is happy.
This is new. Public opinion has historically followed the business cycle, declining in recessions and improving in expansions such as the one we are seeing now. For observers of the economy, this difference was akin to getting lost in the woods. They put forward all kinds of explanations for our unexpected pessimism. that it The media! that it Gas prices! that it Policy And partisanship!
But what happens is not positive feedback. There is a simple explanation, Once you really look at itPeople’s salaries do not keep pace with inflation. People’s discontent with the economy reflects this decline in purchasing power. What causes that is the real puzzle.
The troubling thing about all of these explanations is that they essentially claim that the American public has lost its collective mind. It’s as if, after decades of sensible responses to polls about the economy, everyone suddenly decided “No! Don’t.” that Any more than that!” It’s one thing to ignore a single poll missing the election result by a few points, and another to dismiss years of polls across many pollsters as error or delusion.
Through tradition and training, economists and financial journalists focus their attention on three fundamentals—unemployment, inflation, and aggregate production—and shift all other economic factors to the side. But these are not ends in themselves. It’s a channel for what really matters to families: purchasing power. Since most of us pay our bills through work, this means comparing wages to prices.
For too long, the delusion that these fundamentals represented the economy adequately persisted because it worked. reductions in unemployment Reliable pay raise Relative to prices, increases in unemployment went the other way. So we continue to look at those fundamentals, even though that relationship is now breaking down.
Workers are in significantly worse shape than they were two years ago, despite low unemployment. Measuring this accurately – and more people do not – difficult. You can’t just look at wages in dollars. You have to account for inflation which erodes the purchasing power of wages, And also to the skill of the worker. The $25 hourly wage rate is great for high school business owners but not for engineers 20 years out of college.
“Real wages” is the adjusted hourly wage rate for both of these factors. Households have more purchasing power when it goes up and less when it goes down. For most of 2021 and 2022, they fell. In the second half of 2022, real wages were about 3 percent lower than they were two years ago, which is for the average worker It amounts to a loss of approximately $1,800 per year. Not surprisingly, people’s opinion of the economy was affected. It would be shocking if it wasn’t.
This trend has reversed in recent months – real wages are up in 2023 compared to 2022. The experience of the past two years won’t be thrown away after a few months of data, but the trend is promising.
Economists seem to cling to the delusion that low unemployment automatically creates a strong labor market for another reason as well: It makes the most sense. After all, not only does low unemployment make it easier for people to find work — it also makes it harder for businesses to find workers. To compete for these workers, they raise wages.
There are only two ways around this reasoning. One is the lack of competition. But as a sociologist who spent Too much time Study economicsI don’t think this could be the reason. while the labor market It is already becoming less competitiveLike many markets for goods and services, this is a gradual process, too slow to lead to recent changes in real wages.
This leaves the other option: a collapse in wage determination. Although tight labor markets make it hard to find workers, companies are slow to provide the pay rise needed to get them.
The best way to put it is that wages are not the same liquid Like gas prices that seem to jump up or down in an instant. There are reasons for this. Gas prices can be easily noticed and changed easily, and people will be happy to switch stations to save a few cents per gallon. Labor markets are not like that at all. Switching jobs takes time and effort, and many workers are reluctant to give up the devil they know because they don’t. Employers are taking advantage of this situation by adjusting wages slowly, if at all.
This is what this looks like in practice. A friend of mine is a traveling nurse, who is contracted to understaffed hospitals. These contracts sometimes last for months on end, which is a long time for a hospital to hire more nurses. She could get these nurses with a pay raise, but she’ll have to do it for everyone else or face a backlash. This is expensive, so he uses the staffing agency instead, to avoid any pay raises for as long as possible.
Slow wage adjustment has long been the norm in the United States—and it’s a very general rule. holds for Wages decrease as well as increasesAnd In response to inflation as well as unemployment. In the past fifteen years, in fact, all The observed change in real wage growth was associated with price movement in the other direction. For example, during the Great Recession of 2008 and 2009, real wages increased so much as prices fell unexpectedly that, by chance, everyone’s purchasing power increased. Three years later, prices have risen unexpectedly and real wages have fallen. Either way, it took a while for things to get back to normal.
In this sense, what we are witnessing lately is simply an extreme version of business as extraordinary: high inflation, combined with sluggish wage adjustment, leads to a decline in purchasing power. And this is true not only for the United States. Canada salaries post covid I followed the same path as ours, and She is not alone.
To get out of this gap, real wages must start growing again. The good news is that they already have. Annual changes in real wages turned positive in February; Monthly changes became positive late last year. In this regard, we are doing well. most European economies We still haven’t seen real wage growth.
Moreover, this hole is shallower than it might seem. Since late 2020, real wage cuts have cost families just under $1 trillion. That’s a lot, no doubt, but it’s less than half of what households received in Covid-related transfers — stimulus payments, expanded unemployment insurance, child care credits, and the like — Which amounted to 2 trillion dollars. This puts them Long before where they were in March 2020which is why people report it Their finances are doing welleven while undermining the state of the economy.
The prospects for continued wage growth are good. Late pressure does not mean no pressure, and low unemployment and low purchasing power should continue to put upward pressure on wages. The public has picked up on this. Sentiment indicators started to climb slightly late last year, around the same time that real wages did.
What we need to free ourselves from is the preconceived notion that only low unemployment makes for a good job market. Where we are actually easy to understand. Dollar wages slowly adjust to higher prices. Inflation has pushed prices up a lot, which has reduced purchasing power. As a result, the public is not happy about the economy. This is nothing new – not for this country, not for others – and it is also must pass.
Darren Grant received his Ph. D. in economics in 1995. He is currently Professor of Economics at Sam Houston State University in Texas, where he researches topics as diverse as caesarean section, drunk driving, ballot design, and wage mobility. business cycle. He is an avid cyclist communications And for travel. Learn more about his professional activities and cycling tours here.