American Wages Out of Line? [View All]

The NYT told readers that wages in the United States are out of line with the rest of the world. The basis for this assertion is that the U.S. has a large trade deficit.

http://www.nytimes.com/2009/11/11/business/11views.html?ref=business

The deficit does provide evidence that prices in the U.S. are out of line, but it doesn't necessarily tell us anything about wages. First and most immediately, it suggests that the dollar is over-valued (a point noted in the column). The real value of the dollar is still up from its levels in the mid-90s. A lower valued dollar will reduce wages in the U.S. relative to our competitors, but it will have only a limited impact on real wages in the U.S. (Import prices will rise, which will lead to a limited drop in real wages. For example, if import prices rise by an average of 15 percent, this will lead to a fall in real wages of 2.4 percent.)

It is also possible that U.S. goods are not competitive because profits are too high. The profit share of income had risen over the last three decades, so one could plausibly argue that excess profits are making U.S. goods less competitive. We could also argue that the inefficiency of the sectors of the economy that are protected from foreign competition -- most notably health care -- is driving up the price of U.S. goods and making them uncompetitive. In that story, the problem is not the wages of auto and textile workers, but of doctors and hospital administrators.

- dean baker

http://prospect.org/csnc/blogs/beat_the_press_archive?month=11&year=2009&base_name=american_wages_out_of_line