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NOTE 26. Prices, Wages, and Real Wages

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Prices, Wages and Real Wages

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This is shown most graphically with a look at wages and prices during the decade before and after convertibility.

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While prices fell during the 1870s and 1880s, wages only fell during the Greenback period and rose from 1879 to 1889.

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The figures tell a remarkable story.

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Both consumer prices and nominal wages fell by about 30% during the last decade of greenbacks.

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But from 1879 to 1889, while prices kept falling, wages rose 23%.

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So real wages, after taking inflation, or the lack of it, into effect, soared.

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No decade before or since produced such a sustainable rise in real wages.

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Two possible exceptions are the periods 1909-1919, when the index rose from 99 to 140, and 1929-1939, when the index rose from 134 to 194.

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But during the first decade real wages plummeted the next year, to 129 in 1920, and did not reach 1919's level until 1934.

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And during the 1930s real wages also soared, for those fortunate enough to have jobs.

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In any event, the contrast to this past decade is astonishing.

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And while there are many reasons why real wages increase, three necessary conditions must be present.

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Foremost, an absence of sustained inflation.

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This contributes to the second condition, a rise in savings and capital formation.

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People will not save if they believe their money will be worth less in the future.

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Finally, technological advancement is obviously important, but it is not enough.

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The 1970s saw this third factor present, but the absence of the first two caused real wages to fall.