Save your optimism

Dean Baker appends a well-placed cautionary note to the otherwise very good April jobs report:

In keeping with the overall weakness of the labor market, wage growth continues to be slow. While the April figure shows a respectable gain, the average hourly wage has risen at just a 2.1 percent annual rate over the last three months, well below the rate of inflation. The lowest paid segments of the labor force continue to be hit hardest. Over the last year, the wage gains in retail trade and leisure services have averaged 1.8 percent and 1.7 percent, respectively.

If weak wage growth continues, even in the face of surging productivity, it will pose a serious problem for the recovery as consumer debt reaches its limits. With higher interest rates likely to slow the housing sector, a new source of demand will be badly needed.

In 2003, Bush chose not to pass middle-class "stimulus" tax cuts that would have created immediate consumer demand. For this to work, he had to hope-- nay, gamble-- that wages would rise with the recovery, and consumer demand would pick up of its own accord. Now this gamble could still fail, and fail pretty badly. If nominal wages can't keep pace with inflation, say hello to another long economic lull, especially in the face of rising interest rates and a soon-to-be-splattering housing bubble.