Maybe people aren’t returning to work because real wages have declined in Biden’s presidency

The most worrying statistic in the latest monthly employment report is that the U.S. labor force declined during the month of May. On net, 53,000 Americans dropped out of the labor force, and the participation rate ticked down, from 61.7 percent to 61.6 percent, despite widespread vaccination and 48 of 50 states reopening or having completely reopened. Job gains of 559,000 were 116,000 jobs short of market expectations, the second month in a row of six-digit misses.

Numerous explanations have been offered for why jobs growth has massively disappointed expectations in recent months, including continued school closures, early retirements, pandemic fears and increased unemployment insurance benefits deterring the return to work. 

But there is another, even simpler reason. Since President Biden took office, real wages — by my calculation — have declined every month of his presidency, eroded by large month-over-month increases in overall consumer prices.

While the White House has celebrated wage gains in recent months, the gains they celebrate are before factoring in inflation. In nominal terms, average hourly earnings rose 0.7 percent in April, or 8.7 percent at an annual rate. For production and nonsupervisory workers, they were up 0.8 percent, or a whopping 9.4 percent annualized. 

But once we account for inflation, as measured by the Consumer Price Index, we find that average hourly earnings — again, by my calculation — actually declined 0.1 percent in April, or almost 1 percent at an annual rate, following a staggering 0.7 percent (8.3 percent annualized) decline in March. For production and nonsupervisory workers, real wages, by my calculation, declined at annualized rates of 4.5 percent and 0.2 percent, respectively, in March and April.

Overall, since December, real average hourly wages — by my calculation — have declined by 3.2 percent at an annual rate. For production and nonsupervisory workers, they’re down 2.3 percent.

In May, nominal wage gains once again rose at substantial rates — 0.5 percent month-over-month, or more than 6 percent annualized, for both all workers and production and nonsupervisory workers specifically. The White House was quick to hype strong wage gains in May, without the caveat that these were nominal, not real, gains.

While we will not know the May inflation numbers until Thursday, June 10, high producer and import price inflation in April suggest consumer price inflation likely remained historically elevated in May. Even if we assume that May’s inflation eased a bit from its April pace, ticking down to its three-month average pace of 0.6 percent, that would mean those much-celebrated May wage gains were, in fact, negative in real terms. Indeed, with just 0.6 percent inflation, real wages would actually have declined by even more in May than they already did in April.

While it is good to see rising wages, what ultimately matters for workers and families is that their paycheck can actually purchase a larger basket of goods and services. This is why labor supply responds to changes in real wages, not nominal. Case in point is that on the eve of the pandemic, fully 75 percent of the flows into employment were individuals coming from out of the labor force, attracted by strong real wage growth across the income distribution, but particularly among production and nonsupervisory workers.

To achieve full labor market recovery, it is important that fiscal policy gets things right on both the demand and supply sides. If policymakers focus solely on massively raising aggregate demand without considering that, in the short-run at least, supply is inelastic, then even big wage gains in nominal terms are entirely eaten up by inflation. And if real wages are declining, then we shouldn’t be entirely surprised to see stagnant or declining labor force participation. 

Dr. Tyler Goodspeed is the Kleinheinz Fellow at the Hoover Institution at Stanford University and U.S. Director at Greenmantle LLC, a macroeconomic and geopolitical advisory firm. He was acting Chairman of the White House Council of Economic Advisers from 2020 to 2021.