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FRBSF

WEEKLY LETTER

February 5, 1988

Low Wage Inflation
Wages in the u.s. have risen very slowly over
the 1980s in relation to the general price level.
Indeed, by some measures rea.l, i.e., inflationadjusted, wages have fallen over this period.
However, these measures have ignored
employee benefits, the share of which in total
compensation has been increasing. Compensation per hour - which includes both wages and
benefits - rose by 0.6 percent per year over the
period 1980-1987, as against 2.9 percent per
year over the period 1952-1972.
This decline in real wages has been more pronounced in the unionized sector of the work
force. Since the collective bargaining agreements signed during the early 1980s, workers
have made enormous concessions. Cost-ofliving adjustments and non-wage benefits have
been reduced and there is a burgeoning reliance
on profit-sharing agreements that impart more
flexibility to compensation.
The bargaining climate itself has altered in fundamental ways. Workers have made nonpecuniary concessions and have agreed to many
changes in work rules. The share of the unionized work force in total employment has fallen
from 25 percent in1981 to 19 percent in 1986.
While this decline reflects in part the declining
share of the heavily unionized manufacturing
sector in total employment, the unionization
rates within manufacturing industries have also
been falling. Furthermore, the estimated time
lost in work disputes as a fraction of total working time has fallen from 0.09 percent in 1980 to
0.02 percent in 1987; this ratio averaged 0.14
percent in the preceding thirty years.
Declining productivity growth and the adverse
effect of dollar depreciation during 1980-1985
on the manufacturing sector have been offered
as explanations for the slowdown in real wage
growth. This Letter analyzes the validity of these
explanations and finds that they are not fully satisfactory. It goes on to investigate the importance of other factors, namely, a decline in
jobless benefits and, to a lesser extent, the
deregulation of many sectors of the economy.

Decline in productivity growth
The decline in productivity growth and real
wages dates back to the early 1970s. The productivity decline has been attributed in part to
the oil crises (starting in 1973) and in part to the
changing demographic and sectoral composition
of employment. The rising share of women and
teenagers, who are less experienced and less
productive than prime age males, as well as the
rising share of unskilled service sector jobs are
believed, by some analysts, to have reduced
productivity and, thereby, wages.

The interaction between real wages and productivity is complex. European countries, for example, have also been adversely affected by oil
shocks, yet real wage growth in their economies
has not decelerated to the extent it has in the
U.s. Although declining productivity growth due
to rising oil prices has played an important role
in the deceleration of real wage growth over the
1970s, its importance for the 1980s is questionable because, adjusted for inflation, oil prices
have fallen in the first half of the 1980s.
Besides, real wages have stagnated for all categories of workers. The rising share of less productive teenagers and women, and the rising
share of the service sector in total employment
are not valid explanations of real wage behavior.
In the manufacturing sector, productivity has
risen enormously in the 1980s due to the modernization of plants and the scrapping of
obsolete ones. Excess labor has been permanently laid off. Yet real compensation per hour
in manufacturing, over the 1980-1986 period,
increased by 3.6 percent -lower than the
economy wide increase of 4.3 percent. Clearly,
declining productivity growth plays a smaller
role in explaining low real wage growth in the
1980s.
The dollar
The appreciation of the dollar during 1980-1985
did playa part in reducing wage inflation over
that period. It contributed to disinflation, which
affected wages via formal or informal cost-of-living adjustments, and led to higher unemploy-

FRBSF
ment in the export and import-competing
industries.
However, there is no compelling evidence to
indicate that the wage concessions of the last
five years were motivated mainly by the weakness of the export and import-competing industries, with their concomitant high unemployment. Concessionary contracts extend over a
wide range of industries, many ofwhich are not
exposed to foreign competition, such as domestic air travel and retail food stores. A study by
Philip Cagan reveals that a wage index constructedfor foreign-competing industries rose at
the same rate as a wage index for all manufacturing over 1979-1985.
In brief, neither the strong dollar nor declining
productivity growth provide a fully satisfactory
explanation of the decline in real wage growth
over the 1980s.

Jobless benefits
A dramatic decline has occurred over the 1980s
in the availability of jobless benefits, which are
granted primarily to job losers - those on temporary and permanent layoff who have worked
for a stipulated length of time~. and, in some
cases, to job leavers. A decline in such benefits
induces many laid off workers toacceptalternative, lower paying jobs - and often lower status
jobs as well- more quickly, or to negotiate a
lower wage with their previous employer in
order to get rehired.
Regular benefits are available for approximately
twenty-sixweeks; after they have been
exhausted, extended benefits are provided for
approximately another thirteen weeks. Beyond
that, federal supplemental programs have
provided benefits of varying duration up to
twenty-six weeks. The availability of extended
and supplemental benefits differs greatly across
states.
As can be seen in Chart 1, the ratio of insured
unemployed workers to total job losers has
declined over the last decade, and especially
over the 1980s. Changes in this ratio do not
reflect only changes in policy. In the course of a
recession this ratio falls as more and more job
losers run out of beneflts, it rises during the sub-

sequent expansion as the share of long-term
unemployment decreases. The effect of policy
can be gauged by making a cyclical adjustment
and comparing the availability of benefits at the
same aggregate unemployment rate. Thus, in
1977 when the aggregate unemployment rate
was 7.1 percent, the ratio (including supplemental benefits) was 1.20; in 1985, at an aggregate
unemployment rate of 7.2 percent, the ratio was
0.67.
The insured unemployment rate (lUR) plays an
important role in the provision of benefits. The
IUR measures the ratio of the number of unemployed receiving regular benefits to covered
employment, i.e., those jobs covered by unemployment insurance (UI) plans. Prior to 1981,
extended benefits were granted in a state when
the nationwide IUR reached 4.5 percent, or
when the IUR in that state reached 4 percent. A
major revision of the UI law in 1981 eliminated
this national "trigger" and further raised each
state's IUR trigger to 6 percent. Hence, at the
end of 1982, only fourteen states were offering
extended benefits whereas, without the change
in law, all of them would have.
In addition, federal supplemental benefits,
which during the 1975 recession were available
up to twenty-six weeks in many states, were
drastically reduced during the 1982 recession,
varying between eight and sixteen weeks,
although the latter recession was much more
severe.
Finally, there has been a decline in the availability of even regular benefits, although they
have not been affected by the new law, apart
from the imposition of federal taxation since
1979. The fall in the IUR, relative to the total
unemployment rate, has reinforced the effect of
raising the state triggers.
The IUR may have fallen because applications
for benefits are being scrutinized more carefully
to weed out more claims. This, in turn, may
have discouraged the unemployed from applying for benefits. As you can see in Chart 2, the
ratio of initial claims for (regular) UI to the number of short-term job losers (unemployed for 0-5
weeks) has fallen along with the ratio of beneficiaries to job losers. Finally, as Gary Burtless

Chart 1
Average Number of
Insured Workers per Job Loser

Ratio

1.4

/ ....\

I \\

1.3
1.2

=

1.1

Ratio

0.40

Chart 2
Initial Claims per
Short-Term Job Loser* Have Fallen

Including
supplemental benefits

0.35

~~~~,~~~
~~""

1.0
0.9

Regular and
extended benefits

0.30

Weekly Average

0.8
0.7
0.6
0.5

+-.-....--.--'-----'--'--.---'-----'r-l----'---'---'-----'-----'----'----.---'

1969

1973

1977

1981

1985

pointed out in an exhaustive survey of this issue,
there may be greater difficulty in obtaining benefits because of a reduction, due to budgetary
cuts, in the number of offices through which
these benefits are administered.

Deregulation

>

Another important development that has indirectly affected the labor market is the deregulation of numerous industries: trucking, airlines,
securities, etc. Deregulation has put pressure on
costs, leading firms to make fewer concessions
to union demands than they did previously and
to hire more non-union workers. The competition spurred by deregulation, has been a
motivating factor behind many of the wage concessions. Over 1981-1986, wage inflation was
highest for state and local government workers
who are relatively immune to the prospect of
unemployment. Also, in contrast to the private
sector, these workers' unionization rate has been
increasing.

1969
1973
1977
* Denotes job loss of less than five weeks

1981

1985

Policy implications
There has been increasing concern that, in the
current economic environment, wage inflation
may accelerate. At 5.8 percent in December
1987, the civilian unemployment rate has been
at its lowest level since 1979, at which time
inflation was accelerating. Another source of
concern is that current and prospective dollar
depreciation, by raising price inflation, will raise
wage inflation.
The structural changes discussed above suggest
that the tightness of the labor market cannot be
assessed merely by an extrapolation of past
experience. Furthermore, due to fewer,and
smaller, cost-of-living adjustments, the effect of
dollar depreciation on wage inflation may be
weaker now than during the dollar depreciation
of 1977-1978.

Vivek Moorthy

Opinions expressed in this newsletler do not necessarily reflect the views of the management of the Federal Reserve Bank of San
Francisco, or of the Board of Governors of the Federal Reserve System.
Editorial comments may be addressed to the editor (Gregory Tong) or to the author •••• Free copies of Federal Reserve publications
can be obtained from the Public Information Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco
94120. Phone (415) 974-2246.

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BANKING DATA-TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)

Selected Assets and Liabilities
Large Commercial Banks
Loans, Leases and Investments 1 2
Loans and Leases 1 6
Commercial and Industrial
Real estate
Loans to Individuals
Leases
U.S. Treasury and Agency Securities 2
Other Secu rities 2
Total Deposits
Demand Deposits
Demand Deposits Adjusted 3
Other Transaction Balances 4
Total Non-Transaction Balances 6
Money Market Deposit
Accounts-Total
Time Deposits in Amounts of
$100,000 or more
Other Liabilities for Borrowed MoneyS

Two Week Averages
of Daily Figures

Amount
Outstanding

Change from 12/31/86
Dollar
Percent?

Change
from

12/30/87

12/23/87

207,821
184,030
52,554
72,538
37,648
5,450
16,421
7,370
209,812
55,242
39,296
20,217
134,353

-

-

-

43,898
31,647
19,453

-

-

2.9
4.9
8.0
6.8
- 10.2
2.5
21.9
2.2
- 6.2
- 19.0
- 5.8
0.8
0.9

-

3,204

-

191
302

-

-

761
7,523

2.3
- 27.8

-

Period ended

Period ended

12/28/87

12/14/87

Reserve Position, All Reporting Banks
Excess Reserves (+ JjDeficiency (-)
Borrowings
Net free reserves (+)fNet borrowed(-)

37
15
22

114
4
110

1 Includes loss reserves, unearned income, excludes interbank loans

Excludes trading account securities
Excludes U.S. government and depository institution deposits and cash items
4 ATS, NOW, Super NOW and savings accounts with telephone transfers
S Includes borrowing via FRB, TT&L notes, Fed Funds, RPs and other sources
6 Includes items not shown separately
7 Annualized percent change
2

3

-

6,416
9,535
4,624
4,621
4,312
141
2,953
164
- 14,081
- 12,968
- 2,425
164
- 1,277

16

-

169
33
121
123
167
13
255
54
1,484
1,629
2,980
24
169

6.8