Wages decline amid energy costs

Tuesday, August 29th 2006

U.S. workers’ real wages declined by 0.5 percent over the last year in most manufacturing sectors due to rising energy costs, a new labor report said Monday.

The U.S. economy has been steadily improving since the 2001 recession with a 4 percent annual growth rate during the first half of the year and a record low unemployment rate of 4.8 percent. But surging energy prices and fears over rising inflation have reduced workers’ real wages.

Since 2001, real hourly wages have fallen 0.6 percent, while manufacturing real wages have fallen by 1.7 percent, according to the National Association of Manufacturers’ annual Labor Day report released Monday.

Workers’ total compensation has continued to outpace inflation, but wages have not. Rising energy prices have driven inflation at a faster pace than workers’ take-home pay, the report says.

The Bush administration has taken note of recent declines in real wages for working Americans, but has been quick to point out that the U.S. economy has the flexibility to maintain its strong economic growth.

“Many simply aren’t feeling the benefits. Many aren’t seeing significant increases in their take-home pay. Their increases in wages are being eaten up by high energy prices and rising health care costs, among others,” said Treasury Secretary Henry Paulson, at a recent speech at Columbia University in New York.

Higher energy prices helped push the overall consumer price index moderately last month despite predictions of a slow down in inflation by the Federal Reserve. The CPI, which measures what Americans pay for goods and services, rose by 0.4 percent in July. Overall, CPI has risen by 4.3 percent, faster than the 3.8 percent in nominal wages.

The rise in prices in U.S. goods has resulted in a 0.5 percent decline in real wages over the past year. Omitting the effects of energy prices, workers’ real wages would have increased by 1.2 percent over the same period.

Federal Reserve Chairman Ben Bernanke warned earlier this summer that higher energy prices could restrain labor productivity growth, meaning real wages and profits would be lower than usual.

“A significant increase in energy prices can simultaneously slow economic growth while raising inflation,” said Bernanke, in remarks before the Economic Club of Chicago in June.

The price of energy has increased by 80 percent over the course of the year. Energy prices continued to rise last month, climbing by 2.9 percent, following a 5.3 percent increase in gasoline prices. So far this year, energy prices rose at an annual rate of 25.3 percent, facilitating a further boost in overall inflation to an annual rate of 4.8 percent, compared with a 3.4 percent rise for consumer prices for the same period last year.

Crude oil prices hit $77 per barrel in mid-July amid further turmoil in the Middle East, causing markets to stir up due to hostilities and tight supplies. U.S. consumers are also feeling the pinch in their pocketbooks with gasoline prices increasing to $3.03 per gallon last week, a nationwide record.

“It is a major long-term challenge and one we need to fix through a comprehensive approach,” Paulson said. “We need to do more on the supply side, and we need to do more to conserve energy.”

Industry experts agree that all U.S. sectors must do more to invest in new technologies and further develop alternative sources of energy, including nuclear power and ethanol.

U.S. energy production is not expected to keep with domestic consumption, according to the U.S. Energy Information Administration, even with an expected 32 percent gain in energy efficient over the next 20 years. According to the Department of Energy, the United States is expected to import about 32 percent of its domestic energy needs by 2025.

NAM has called for “energy reform” that would include: maximizing domestic exploration like ANWAR and offshore drilling in the Gulf of Mexico, increasing energy efficiency and conservation, funneling greater investment in research to develop new fuels and technologies for alternative sources of energy, and reforming U.S. regulatory process.

“The time has come to build a national energy policy to address these costs by increasing domestic production and supply,” said John Engler, NAM president and CEO.

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