The Relationship between Wage Growth and Inflation

November 09, 2015

What is the relationship between inflation and wage growth? The figure below is a scatterplot of:

wage growth and inflation

Each of the orange circles represent a month of the period January 1960 through June 2009, the end of the Great Recession. The blue circles are represent July 2009 through September 2015. The curved red line shows the relationship between inflation and wage growth for the period January 1960 through June 2009.

The positive slope of the curved line indicates that as inflation increases, wage growth also rises. Real wage growth—or the difference between wage growth and inflation—would be independent of inflation if the slope of the line was constant and wages increase one to one with inflation. In fact, the slope of the line declines with inflation, indicating that periods of higher inflation (especially higher than 6 percent) were also periods of lower real wage growth.

Recently, wage growth and inflation have been low relative to U.S. history, as indicated by the fact that the blue circles are in the bottom-left of the figure. Perhaps more importantly, this figure shows that, even conditional on inflation, wage growth has been low recently, as most of the blue circles are below the fitted line.

In a frictionless economy, such a reduction in wage growth would be a consequence of slower growth in labor productivity or output per hour. That decline in labor productivity actually occurred: Output per hour worked grew at an average yearly rate of only 1.2 percent from the third quarter of 2009 to the second quarter of 2015, while it grew at an average yearly rate of 2.1 percent from the first quarter of 1960 through the second quarter of 2009.1

Notes and References

1 Nonfarm business sector: real output per hour of all persons, percent change from a year ago, quarterly, seasonally adjusted.

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About the Author
Juan Sanchez
Juan M Sanchez

Juan M. Sánchez is an economist and assistant vice president at the Federal Reserve Bank of St. Louis. He has conducted research on several topics in macroeconomics involving financial decisions by firms, households and countries. He has been at the St. Louis Fed since 2010. View more about the author and his research.

Juan Sanchez
Juan M Sanchez

Juan M. Sánchez is an economist and assistant vice president at the Federal Reserve Bank of St. Louis. He has conducted research on several topics in macroeconomics involving financial decisions by firms, households and countries. He has been at the St. Louis Fed since 2010. View more about the author and his research.

This blog offers relevant commentary, analysis, research and data from our economists and other St. Louis Fed experts. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.


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