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Labor productivity growth is vital to the justification of getting a raise. A raise in real purchasing power especially. There is a problem with productivity growth unfortunately.

According to The Conference Board, in 2011, labor productivity growth measured in GDP per hour of work, grew only 0.8% year over year. In 2012, it is estimated to have grown just 0.2%, the 3rd lowest year over year growth rate post WWII. They forecast it to grow only 0.6% in 2013.

These low productivity rates have not been good to real wage growth, which has been negative in real terms in both 2011 and 2012!

First, let's take a look at this 10 year chart showing year over year percent changes in labor productivity output per hour (green bar) followed by average hourly earnings for production and nonsupervisory workers (blue bar) and the consumer price index (red bar).

The chart goes from the years 1965-1974 and makes for easy explanation of this thesis.

(click to enlarge)

What you want to see is for at least that green bar, productivity, to rise year over year; the higher the better. Then you want to see the blue bar, wages, rise higher than the red bar, which is the rate of inflation. The difference between the two is the rate of real wage growth.

You can see that every year from 1965 - 1972, workers always received real wage growth. This provided the average wage earner more purchasing power for a higher standard of living.

In 1973, although productivity growth went up year over year, wages grew just shy of the rate of inflation. This was likely due to the oil crisis of 1973/1974.

Then in 1974, productivity went negative. While folks still got raises, those raises were well below the rate of inflation. This was partly due to the low rate of productivity growth that year.

From 2002 - 2012, it's been rather mixed with regards to the average wage earner receiving a raise that was above the rate of inflation.

Out of the last 11 years, six were years when wages rose more than the rate of inflation while in five of the years, inflation was higher than wage growth.

Here is the chart:

(Note: Output per hour for 2012 is missing in this chart but it was estimated to be 0.2% by The Conference Board)

(click to enlarge)

Since the end of this last recession, which brought about a collapse in aggregate demand causing a temporary drop in inflation, as can be seen in the year 2009, the Fed has been pumping money into the economy via Quantitative Easing to help stimulate the economy. This has helped to facilitate the Federal government to both borrow lots of money and pay low rates of interest. But this QE has had little effect on productivity growth because investment spending is still down.

The Conference Board forecasts we'll have labor productivity growth of only 0.8% in 2013, which would be the 3rd year in a row of sub 1% year over year productivity growth.

These low rates of productivity are likely to give reason for low wage increases throughout 2013.

The ending of the payroll tax holiday that has already started this month is likely to be even more painful without meaningful wage increases, which don't appear likely in 2013.

My forecast is for year-over-year wage increases to be about 1.0% - 2.0% in 2013 but for inflation to be between 2.0% - 3.0%.

This would be the 3rd year in a row of negative real wage growth.

Ultimately, aggregate demand of goods and services will at a minimum be under stress, so have low expectations for any meaningful economic growth in 2013 and expect more stagflation.

The silver lining for wage growth is that employees really start getting aggressive about asking for a raise given the higher payroll tax this year. Also, corporate profits are still near all-time highs as a percent of GDP, so employers should have room for paying their employees higher wages despite poor productivity gains. This of course would be bad for profits however.

I'll be watching these trends closely in the coming months for direction and following up accordingly.

Source: Why I Estimate Negative 1% Real Wage Growth For 2013