U.S. wages rise, but inflation is rising faster

The economy is growing but American workers are losing ground against inflation, a new report shows.

The Labor Department said yesterday that the average worker's wages were up 2.5 percent in the April-to-June quarter compared with the same period last year, while inflation grew 3.3 percent.


The 12-month wage gain was the smallest increase in more than 20 years of record-keeping.

"Unless there's some real pickup in wages, that's going to have some real dampening effect on consumer spending in the second half of the year," said Steven Wood, president and principal economist at Insight Economics LLC in Danville, Calif. "And with consumer spending accounting for two-thirds of the economy, that could be a real danger sign."


Recently released Internal Revenue Service data show that the nation's collective paycheck has been in a free fall since 2000, when the stock market bubble burst.

The data show that total adjusted gross income reported by taxpayers fell from $6.35 trillion in 2000 to $6 trillion in 2002, the latest numbers available. The decline marked the first time in more than 50 years that adjusted gross income has fallen for two consecutive years.

Economists say the decline can be pegged to a series of body blows the economy absorbed during the past four years.

The Internet implosion was followed by a series of corporate accounting scandals, blockbuster bankruptcies and the Sept. 11 terrorist attacks. Among the hardest hit were high-paid managers and white-collar workers who drove the Internet economy.

Economists blame continued uncertainty for holding down wages.

Why pay any more?

"Why pay someone even more money if I can get away with paying them what I'm paying?" said Richard Yamarone, an economist with Argus Research Corp. "The answer is that there's no impetus for business people to pay their employees more because of the great uncertainty that lies with respect to terrorism and other threats."

The latest indicators will undoubtedly become fodder in the presidential campaign, as the candidates spar over the state of the U.S. economy and who can be trusted most to put more money in voters' pockets.


Democrats have criticized President Bush for a net loss of 1.1 million jobs since he took office. But Republicans point to the strongest labor expansion since 2000, with an average of more than 200,000 new jobs being created in each of the past six months. Most economists expect that pace to continue through this year.

Democrats argue that most of the new jobs pay far less than those recently lost and have sharply limited or no benefits.

Benefit costs, which climbed 7.2 percent year-over-year, also are putting pressure on wages, said Wood, the Insight economist. The latest increase follows a first-quarter increase of 2.4 percent, which was the biggest in more than 20 years.

"This is a pure cost item to the employer," he said. "It's not as if the employer is being more generous with the benefits they're giving employees. If anything, we know they're being less generous because they're passing the increases to their employees."

Jobless claims rise

In a separate report yesterday, the Labor Department reported that first-time jobless claims climbed by 4,000 to 345,000, a figure that economists say indicates a still-improving labor market. As job growth continues, wages should follow, economists said. But it will take time.


"You probably won't see it before the end of the year," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pa. "We're just beginning to see the job gains, and it'll probably take a few more months of solid job gains before employees feel confident enough to start looking for other jobs, and then businesses will have to offer higher wages to attract people."

With wages in check, the Federal Reserve will be unlikely to feel pressure to raise interest rates faster, economists said. Fed policy-makers have said they can afford to boost rates at a measured pace so long as inflation remains under control.

"In the near term, inflation is likely to be relatively well contained and the pickup in inflation over time should be relatively gradual," said Alan Levenson, chief economist for Baltimore-based T. Rowe Price.

Levenson said he expects the Fed to raise rates by a quarter-point at each of its next 12 meetings.