Real wages and old-time macroeconomics

I posted this graph at Maclean's earlier today:

The hook of the piece was that Canadian real wages had increased in Canada, and I made the point that this increase was largely due to the Bank of Canada's undershooting its inflation target. 

I went to the FRED site and put together a similar graph, using two wage measures that seemed fairly broad:

 

This looks a lot like what the macro I used to teach 20 years ago would have predicted: the goal of monetary policy in times like these is to engineer an economy-wide wage cut, be it by increasing the price level, depreciating the currency, or both. Labour demand curves slope down.

 

Comments

[David]

Steve:

Not so fast. It would be interesting to know what role "composition bias" is playing in this average wage data (the quality of the remaining workforce is higher, because all the low quality workers have been laid off).

[Gene Callahan]

"increasing the price level, depreciating the currency, or both..."

Aren't these just two ways of looking at the same thing, rather than two alternate things monetary policy might do?

[Benoit Essiambre]

This is one aspect of monetary easing that confuses me. At first I thought, like you describe above that creating more money was meant to depress real wages as this wage correction was needed to lower unemployment. However, when thinking further, I came to the idea that printing money would make nominal wages continue their upward trend but also put upwards pressure on real wages since the greater amount of production would mean more overall real income and the lower unemployment would mean a better negotiation position for labor. Low interest rates means capital doesn't need to generate as high a return so more money can go towards wages.

The point of printing money then becomes not about a downward correction in real wages, as many workers fear, but about putting money that is waiting on the sidelines into more productive investments. Investment into private infrastructure for example, also help workers and gives them further bargaining power as capitalists wouldn't want to let the new buildings and tools stay idle and decay for lack of people to operate them.

We could explain the high real wages in your graph above from some other factor such as all the Alberta oil money. If money would have been easier, real wage would have been even higher. I know that if unemployment wasn't above 10% here in the maritimes, people wouldn't be moving to Alberta to fill positions and wages would probably be considerably higher both here and there.

[Guest]

Contrast this with Jared Bernstein's NYT column -- http://economix.blogs.nytimes.com/2013/09/09/why-labors-share-of-income-is-falling/?_r=0