When White House press secretary Karine Jean-Pierre recently claimed that “the CPI data [showed] that wages have increased,” I assumed her reference to the CPI (consumer price index – that is, inflation) was accidental, as the reality is that wages have not experienced any increase when adjusted for inflation. Not since pre-pandemic, the election of 2020 or since President Biden took office in January 2021.
But when the official @POTUS Twitter account claimed that real wages are higher now than pre-pandemic, I realized how widespread is the misunderstanding of some basic economic concepts – because surely no politician would ever intentionally misstate something.
So here is some Econ 101.
The term “real wages” refers to the purchasing power of wages at a specific point in time. If your wages increase 10% in a period that consumer prices (measured by the Consumer Price Index) increase 7%, your real wages will only experience a 3% increase. The 10% wage increase before accounting for inflation is called the nominal increase.
There are all sorts of different measures of wages, all of which can be stated in both nominal (not adjusted for inflation) and real (inflation-adjusted) terms. Some of these include median weekly earnings, average hourly earnings, the employment cost index, wages and salaries for private industry, wages and salaries for government employees and nonfarm business wages.
In the second quarter of this year, the average personal income per capita in the U.S. was $67,922, up from $61,741 in March 2020. But that 10% increase of $6,181 doesn’t account for the 15.4% increase in the CPI. If you were an average wage earner in both March 2020 and June 2023, buying the average basket of consumer goods and services, the purchasing power of your income has fallen from $61,741 (in 2020) to $57,460 today. That is, despite enjoying a wage increase of $6,181, your new income purchases $4,281 less stuff.
It’s akin to cutting an 8-inch pizza into 10 slices, versus cutting a 12-inch pizza into 10 slices; the result is less pizza.
I considered the possibility that the White House folks may have simply gotten their dates wrong, not their economic term definitions. That might explain their financial faux paus. In the second quarter of this year, median real earnings increased about one-half of a percent. Perhaps that is what the White House Tweeter meant to say, instead of “than before the pandemic.”
Of course, it is also possible that the White House phrase “before the pandemic” might have referred to the Spanish Flu pandemic or some notable pre-pandemic year such as 2000 or 1776. If so, Ms. Jean-Pierre’s claim is 100% accurate.
David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.