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How high oil prices hurt wages and limit economic growth

Wages don’t rise at the same time as oil prices rise, Tverberg writes. The result is a mismatch between what citizens can afford, and the cost to manufacture and transport products.

By Gail TverbergGuest blogger / February 27, 2013

Fuel prices are displayed at a gas station in New York. Oil plays a very direct role in growing and transporting food and in making gasoline, Tverberg writes.

Keith Bedford/Reuters/File

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In my view, wages are the backbone an economy. If workers have difficulty finding a job, or have difficulty earning sufficient wages, the lack of wages will be a problem, not just for the workers, but for governments and businesses. Governments will have a hard time collecting enough taxes, and businesses will have a hard time finding enough customers. There can be business-to-business transactions, but ultimately somewhere “downstream,” businesses need wage-earning customers who can afford to pay for goods and services. Even if a business produces a resource that is in very high demand, such as oil, it still needs wage-earning customers either to buy the resource directly (for example, as gasoline), or to buy the resource indirectly (for example, as food which uses oil in production and transport).

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Gail Tverberg, an actuary with a background in math, analyzes energy and financial matters from a perspective that the world has limited resources. For more of Gail's posts, click here.

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It is not just any wages that are important. It is the wages paid by private companies (rather than governments) that are important, as the backbone to the economy. Governments tend to get their revenues from private citizens and from businesses, both of which are dependent on wages of private citizens. There are a few pieces outside of this loop, such as taxes on imports from foreign countries. With the advent of free international trade, this source is disappearing. Another piece outside the US wage-loop is taxes on resource extraction, if these resources are exported.

Instead of using the analogy of a backbone, perhaps I should say that wages are the base that ultimately determines the quantity of goods and services an economy can afford.

Obviously there are other kinds of income, such as “rents,” but these, too, ultimately come from wage earners. Furthermore, businesses cannot earn money to pay dividends unless some consumer, somewhere, can afford to buy the goods and services their business is selling. 

I have written recently about how the proportion of Americans with jobs rose to a peak, and since has been declining.

I decided in this post to look at the dollars these workers are earning. In particular, I decided to look at wages, other than government wages, adjusted to today’s cost level using the “CPI- Urban,” cost index of the Bureau of Labor Statistics.  I discovered that these wages are doing very poorly. I also discovered a disturbing connection between high oil prices and flattening or declining wages. Putting all of these pieces together suggests a connection to “Limits to Growth.”

Per Capita Non-Government Wages

If we take inflation-adjusted non-government wages, and divide by the total US population (not just employed workers), we get a measure of the extent to which wages have been growing or shrinking. Some of this growth will be from a second wage-earner in a family joining the workforce. Some of this growth will be from families in recent years having fewer children, so that adults make up a larger portion of the population. If some jobs move overseas and are not replaced, this will act to reduce wages.

Comparing Figure 2 and Figure 3, we can see that they follow generally the same shape. A major portion of the increase in wages in Figure 3 is thus driven by a higher proportion of the population having jobs, at least up until the year 2000.

Figure 3 emphasizes how poorly wages have performed since the year 2000. Average wages on a Figure 3 basis hit a high point of $$19,112 in 2000. They then dropped back to $18,145 in 2003. In 2007, they briefly surpassed the year 2000 high point, hitting $19,573. More recently they dipped again and (with government deficit spending) have recovered a bit, rising to $18,053 in 2012. This is very low by historical standards; it is between the level they were in 1998 and 1999.

Looking at Figure 3, the other time when wages were flat was the period between 1973 and 1983. The thing that is striking is that both the current period and the previous “flat” period took place during periods of high oil prices (Figure 4, below). The vast majority of the rise in non-government per capita wages that has taken place has happened when the inflation-adjusted price of oil was less than $30 barrel.

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