Recap 2-14-14: Real Wage Growth is Mirage


So there’s been a bit of talk recently about how real wage growth could induce the Fed to hike earlier… which sounds good except for the fact that the data doesn’t back it up. The chart below shows the Average Hourly earnings growth deflated by core PCE vs the difference between the Unemployment rate and the CBO’s estimate of NAIRU. Basically, the historical relationship suggests that real earnings growth is not likely to increase substantially anytime soon.

And there are several additional caveats too. First, the Core PCE measure is unusually low now (just above 1%) due to base effects. Once the measure moves to above 1.5% as most people expect, the real wage growth measure will fall. In addition, note the large gap between the red and blue lines over the past 5 years. The reason for that is of course at least partially due to downward wage stickiness. In other words, workers really don’t like taking pay cuts so companies generally defer cutting pay and adjust via layoffs and/or fewer hours instead. Then, as growth picks up, companies hold off on raising wages until that ‘slack’ is fully used up. As a result, following deep recessions (such as the one in the 80’s) real wage growth can remain much weaker than what the Unemployment Gap measure indicates.


  • EU GDP printed +0.3% q/q versus +0.2% expected. Germany +0.4% vs 0.3% expected. France +0.3% vs +0.2% expected. Italy +0.1%, inline. Portugal +0.5% vs +0.1% expected.

  • UMichigan Confidence was stable at 81.2 vs 80.2 exp
  • David Rosenberg thinks wages and rents will head higher as the job and housing market rebounds. “Whether you’re bullish or bearish on the economy, the one universally held view right now is that there is no inflation whatsoever.”

Upcoming Data:

  • Mon: US Holiday, Japan GDP, IP, RBA Minutes
  • Tue: BoJ, UK CPI, German Zew, Turkey Central Bank, US Empire Mfg, NAHB
  • Wed: BoE Minutes, UK Employment, US Housing Starts, PPI, FOMC Minutes, China Flash Mfg PMI
  • Thu: EU PMI, US CPI, Jobless Claims, Markit PMI, Philly Fed, EU Consumer Confidence, BoJ January Minutes,