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How Flatlining Wages Are Suppressing the Economic Recovery

How's your paycheck looking these days? If it's like that of most Americans, it hasn't risen much lately. Annual wage growth has fallen from a rate of 3.8 percent in 2007 to, as of May, a meager 1.8 percent. Average hourly wages are flat, too.

That tells us a couple important things about the state of the economy. For one, it suggests that the inflation goblins are not, despite the fears of deficit hawks, lurking under the bed. Although food and energy prices have increased in recent months, broader measures of inflation are unlikely to surge unless wages pick up. And that won't happen until employers start hiring again, or at least fewer people stop applying for jobs.

For another, it should scotch any talk of consumers hauling the economy out of the mud. Because if wages are stagnating, I'm not going shopping. You?

Liberal economists and pundits have been warning about the impact of slowing wage growth on the economy for years. But you know who surprisingly seems to get it? None other than Larry Summers, until recently President Obama's chief economic adviser and a man not exactly renowned as a voice for the common man. In a recent op-ed, Summers makes a cogent argument that stagnant wages, high unemployment and government spending cuts are a recipe for recession:

Beyond the lack of jobs and incomes, an economy producing below its potential for a prolonged interval sacrifices its future. To an extent that once would have been unimaginable, new college graduates are this month moving back in with their parents because they have no job or means of support. Strapped school districts across the country are cutting out advanced courses in math and science and in some cases only opening school four days a week. And reduced incomes and tax collections at present and in the future are the most important cause of unacceptable budget deficits at present and in the future.
Budget deficits that Washington seems intent on slaying, no matter what other dragons are ravaging the economy. Until Congress and Obama decide to combat the real problem -- jobs, wages, demand -- don't expect that paycheck to surge anytime soon.

Chart courtesy of the Economic Policy Institute

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