26. Prices, Wages, and Real Wages

0:00Prices, Wages and Real Wages This is shown most graphically with a look at wages and prices during the decade before and after convertibility. While prices fell during the 1870s and 1880s, wages only fell during the Greenback period and rose from 1879 to 1889. The figures tell a remarkable story. Both consumer prices and nominal wages fell by about 30% during the last decade of greenbacks. But from 1879 to 1889, while prices kept falling, wages rose 23%. So real wages, after taking inflation, or the lack of it, into effect, soared. No decade before or since produced such a sustainable rise in real wages.

0:49Two 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. But during the first decade real wages plummeted the next year, to 129 in 1920, and did not reach 1919's level until 1934. And during the 1930s real wages also soared, for those fortunate enough to have jobs. In any event, the contrast to this past decade is astonishing. And while there are many reasons why real wages increase, three necessary conditions must be present. Foremost, an absence of sustained inflation. This contributes to the second condition, a rise in savings and capital formation.

1:37People will not save if they believe their money will be worth less in the future. Finally, technological advancement is obviously important, but it is not enough. The 1970s saw this third factor present, but the absence of the first two caused real wages to fall.