A brisk rise in American wages

Pay rose faster than the cost of living for the first time in years.

American paychecks are rising again at a pace not seen since the 1990s.

The pay increase amounts to 4 percent on average over the past 12 months, and it comes at a very helpful time for millions of households.

For three years, pay increases haven't kept pace with the rising cost of living. Then came this year's housing slowdown, which has further squeezed family finances.

Those setbacks, however, are now being offset by rising income. Four percent may not sound like much, but you have to look back to 1997 to find a calendar year with a gain that big.

Equally significant, tamer energy prices mean that the "real" wage gains, after inflation, are above 3 percent for the past 12 months. That, too, hasn't happened since the 1990s, even though the economy has been expanding over the past five years.

"The striking feature of this expansion has been that ... real wages for the typical worker haven't risen that much," says Richard Berner, US economist at the investment bank Morgan Stanley in New York. But with real incomes rising, he says, "you get a picture of an economy that can weather this housing storm."

The risk of recession hasn't disappeared, he and other economists say. But with a fairly tight job market and low unemployment, many expect that paychecks will keep rising solidly in 2007.

Sandy Nelson has seen the strength of rising incomes first hand this year.

She runs Mulberry Road, a children's store near Boston's trendy Newbury Street, and says traffic has been increasing.

More customers means more income for her – and more money to keep investing in her young business.

"I have more of what people are looking for," she says, pointing to racks of colorful clothing for toddlers.

In other words, Ms. Nelson is ready for the vital holiday season.

"I'm just hopeful that it will be as good as what they're saying," she says, citing retail forecasts that New Englanders will spend more than $700 on gifts this season, on average.

The average private-sector paycheck is now $573 per week, according to Labor Department figures that cover about 8 in 10 workers – those in production or nonsupervisory jobs.

As recently as this past October, weekly pay adjusted for inflation was below where it was when President Bush took office in 2001. In effect, rising prices for things like healthcare, college tuition, and especially for energy ate up all the wage gains of an expanding economy, and then some.

The spike in energy costs was extreme, but the pattern was a common one. Wages generally rise fastest when the economy is strong and inflation is low.

That's why this moderation in fuel prices is so important.

Dan Thompson, who drives a DHL delivery truck in Boston, can hardly remember the pay raise he thinks he got earlier this year. But lower gasoline prices lately have been like an instant addition to his income.

"Thank God for that," Mr. Thompson says. He fills his tank often, since he drives to work every day from Salem, N.H.

Although the wage trend nationally has been steadily upward this year, it's unclear how much the inflation side of the equation will continue to benefit workers. Last week, the Labor Department reported not just tame inflation but an outright drop in consumer prices. The more typical pattern – and the one expected in the months ahead – is modest inflation, not deflation.

Even so, many analysts see a climate that's promising for more growth in real income.

"Expect wages to maintain a decent clip at least through the first half" of 2007, says Jared Bernstein of the Economic Policy Institute, a liberal-leaning research group in Washington.

Those gains lately have been fairly broad-based across all pay levels, but they come at a time when wage growth seems to be harder to come by than in the past.

One key reason, Mr. Bernstein says, is an increasingly global market for labor.

"If your work can be routinized and digitized, you're in global competition in a way that you weren't a decade ago," he says.

The key questions for the economy – and for worker pocketbooks – are whether the job and wage growth continues, whether the housing slump deepens, and what happens to energy prices.

"With oil prices down, we're less worried" about a recession, says David Wyss, economist at Standard & Poor's in New York.

Another positive sign: Companies are laying off fewer people this year, says John Challenger, who heads the outplacement firm Challenger, Gray & Christmas in Chicago.

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