Wages, Inflation, and Productivity

by Erik Knoder

October 4, 2018

Many people know that wages have struggled, and often failed, to keep up with inflation. It is less often discussed that wages have also done poorly compared with productivity. Although nominal (face-value) wages have increased roughly four-fold in Northwest Oregon from 1976 to 2017, inflation increased slightly more than that nationwide, and labor productivity more than doubled, also measured nationwide.
Another way of stating this is that if wages in Northwest Oregon had kept up with inflation and productivity over the last 41 years the annual average wages in the five counties would range from about $80,000 to $104,000 per year today.

Inflation adjusted wages increased more or less in line with productivity from the late 1940s until the late 1970s – then their growth rates began to diverge sharply as productivity grew rapidly during the computer age, and inflation-adjusted wages never recovered from the high inflation of the late 1970s.

The economy of Northwest Oregon has changed in many ways over the last 41 years, and one main way is the increase in service businesses and the loss of manufacturing and natural resource businesses. Other changes include the entry of the baby boomer generation and women into the labor force and the decrease in labor union membership. One change that doesn’t seem to be strongly related to flatter wage growth is foreign trade. The U.S. did run larger trade deficits starting in the early 1980s, but the trade deficit didn’t increase rapidly until the late 1990s. Inflation adjusted wages actually increased a bit during the late 1990s. With today’s tighter labor market and higher minimum wage laws, wages are again increasing faster and slightly reversing this long-term trend.

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