Workers' purchasing power rises despite slowdown in wage and salary, (EXCERPT), Monthly Labor Review Online, May 1984

Workers' purchasing power rises
despite slowdown in wage and salary

Richard Schumann

Changes in the purchasing power of wages and salaries, as measured by the constant-dollar Employment Cost Index (ECI), show a dramatic reversal during the last 4 years (1980-83) from the trend of the preceding 4 years (1976-79). The rate of change declined steadily from 1976 through March 1980, but since then has generally been rising. During the last 2 years, purchasing power has actually increased. (See chart 1.) This improvement occurred despite a sharp drop in the rate of increase in wages and salaries, as measured by the current-dollar ECI. The explanation for this apparent anomaly is that although the rate of wage and salary increase has been dropping, the rate of price increase has declined even faster.

This article examines fluctuations in the purchasing power of wages and salaries for private industry workers, as well as for major industry and occupation categories, over the 1976-83 period. The critical determinant of purchasing power changes has been the rate of increase in consumer prices. There appears to be no clear relationship between the stage of the business cycle and changes in purchasing power but, consistently, the ECI adjusted for price changes (constant-dollar ECI) rose most when prices rose least, and vice versa. Fluctuations in purchasing power reflect the greater volatility of price increases, compared with wage and salary gains, over the past 8 years: pay increases trail price changes during periods of rapid price rises, and exceed price increases when the rate of price change is low.

Over the 8-year period studied, purchasing power decreased for most workers. However, changes were not uniform across the economy. Some groups lost more purchasing power than others, and a few groups even experienced an increase. None of the occupational or industry groups studied gained purchasing power during the 1979-80 period of high price inflation, no matter the size of their wage and salary increases.

This excerpt is from an article published in the May 1984 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.

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