A policy of wage suppression?

I like the Edward Harrison quote I showed yesterday. When I like what I read, I read it again. When I read it again, there is often a "hold on a minute" moment. There was one of those moments, this time. Harrison says in part

... economic policy ... is predicated ... on suppression of domestic wage growth...

Re-reading those words, I remember arguing against the idea that policy is predicated on the suppression of wage growth. Back in 2010 -- coincidentally the same year as the Ed Harrison post from which I quoted -- Steve Waldman wrote

I am not a fan of the Great Moderation. Central bankers and economists found it pleasant at the time, but sustaining that comfort required that cash wage growth be suppressed [and] that credit be expanded...

Back in 2010, I responded:

The Federal Reserve does not manage wages. It does not control wages. It controls attempts to control the quantity of money, by controlling interest rates an interest rate.

I've come around a little since then. I certainly don't think the Fed's focus was only on wages, but I certainly don't mind saying that Fed policy had an effect on wages. So when Harrison says Fed policy was "predicated" on suppression of wages, I can imagine he means that Fed policy resulted in the suppression of wages. And I can live with that.

Then, rereading Harrison, I find him saying

the goal is to increase corporate profitability and this is very much dependent on suppressing wage growth.

and I start to bristle again. But he undermines my objection:

Also, regarding economic policy in the United States, policy makers aren’t gathering around a table and asking “how can we drive down wages and goose consumption at the same time?” Rather, this is the de facto policy which is inherent in monetary and industrial policy.

Exactly! Thanks, Ed. Wage suppression may be the result but is not the focus of policy. Policymakers are not evil. They're hapless.


Harrison's current post shows a graph of average hourly earnings. I chased down the dataset and looked further back in time. Too bad it only goes back to 1965:

Graph #1: Rate of Change in Average Hourly Earnings

At first glance, wage suppression seems obvious. But is it? The big decline of the early- to mid-80s was the Volcker Squeeze that turned double-digit inflation into disinflation.

Since the Volcker Squeeze there seems to be an upper limit of about 4% annual increase. We've reached that limit three times since the 1990s. That does look intentional, as if wage suppression really was the focus of policy. But I think we are fooled by happenstance.

The 4% upper limit looks low because we're comparing it to the seven or eight or nine percent increases of 1969-1981 -- because that's all there is to see on the graph! But those higher wage increases all occurred during a raging inflation.

Just at the start of the graph, before that raging inflation, we see a few wage increases near 4%. But this evidence from 1965 is only a teaser, for the graph shows nothing of what happened in the years before 1965. That's the "happenstance": We have data for the Great Inflation, the years since, and nothing else.

Perhaps, before 1965, wage hikes tended to be above 4%. Perhaps, below 4%. We don't know. So we cannot look at the graph and conclude that wages have been suppressed since the mid-80s. And we cannot conclude that they haven't.


What if we take Harrison's data and take the inflation out of it? Deflate the numbers to remove inflation, and look at the rate of change of the real values. Does the graph still hint at a policy of wage suppression since the mid-80s? You tell me:

Graph #2: Growth Rate of Inflation-Adjusted Average Hourly Earnings

Rather than falling from 1981 to 1986 and then running low, we see it running low from 1980 to 1986 and then rising to a 1998 peak. While running low, it was below zero much of the time, so that real wages were falling. Thus the Economic Policy Institute can say

Wages for the vast majority of American workers have stagnated or declined since 1979

After the 1998 peak, you can see weakness in the economy, as the later highs are lower and lower again. Recent years have not been good. Real wage growth went below 1% in 2010. It went below 1% again in 2011, and stayed low. I count only three or four times since then that it briefly broke through the 1% ceiling.

Come to think of it, the story is that the Fed has been raising interest rates because unemployment is low and wages are rising. No wonder people speak of wage suppression. There's no joy in Mudville.