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Last week Dean Baker and Jared Bernstein laid out the stakes of the debate over whether recent wage trends indicate that the Fed should raise short-term interest rates sooner rather than later. The data show clearly, they argue, that there’s plenty more room for wages to rise before lots of upward pressure on inflation is generated.

A key part of their argument bears repeating: One should not look at only the past couple of years of wage data to decide whether wages are about to shoot up and wreak inflationary havoc on the economy. A longer view is needed.

Every now and then a blip in the short-run wage data can get people thinking that wages are about to accelerate (see the outsize attention given to the 3% annualized growth in the employment cost index in the second quarter). That’s well above the 2% trend in that series since 2009. But there was 1.3% (annualized) growth in the employment cost index in the first quarter, and the year-over-year trends have barely budged (quarterly numbers can look pretty different depending on whether one studies only quarterly changes or year-over-year comparisons).

Hair-trigger warnings about wage acceleration look particularly odd when viewed in a longer-term perspective. I co-authored a paper with colleagues at the Economic Policy Institute that surveyed lots of these historic wage-trends pretty exhaustively. Here’s the key thing: Inflation-adjusted hourly wages for the bottom 30% of workers were either flat or outright fell between 1979 and 2013; hourly wages for the bottom 60% of the wage distribution grew 0.2% or less annually; and wages for the bottom 80% grew 0.5% or less annually. Add in non-wage compensation and performance looks a bit better, but wage growth for this group cannot be nudged anywhere near growth in economy-wide productivity.

Many things are behind this enormous downward pressure on wages, but the role of policy decisions that intentionally shifted bargaining power away from low- and moderate-wage workers is significant. Alan Greenspan highlighted this reduced bargaining power as a driver of downward wage pressure in Senate testimony in 1997:

But the rate of pay increase still was markedly less than historical relationships with labor market conditions would have predicted. Atypical restraint on compensation increases has been evident for a few years now and appears to be mainly the consequence of greater worker insecurity. . . . Thus, the willingness of workers in recent years to trade off smaller increases in wages for greater job security seems to be reasonably well documented.”

Ironically, only the very tight labor markets allowed by the Greenspan-led Fed and the wage growth they spurred between roughly 1996 and 2002 kept the post-1979 wage performance for American workers from being an even worse disaster. Absent those years, hourly wage growth for the bottom 60% of the wage distribution was negative.

This historical data on wages, along with the many indications that forces–including economic policies–put great downward pressure on them, indicate that most people hold the wrong worry regarding pay. The concern shouldn’t be that wages will defy all previous trends and, out of the blue, spark a wage-price spiral (something that hasn’t happened since the 1970s oil shocks). The right concern is that the Fed won’t be able to do enough to ensure decent wage growth for workers in the coming years.



Why the Fed Should Hold Its Fire on Inflation

Is Wage Growth the Problem or the Solution?




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