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In the Nation's Interest

I Can See Clearly Now…That Wages Are Rising

Gad Levanon of our sister organization, The Conference Board (TCB), posted this blog earlier this week: “Is Wage Growth Accelerating? All signs point to Yes!”  Gad’s message was that there are many different ways to measure wage growth out there, “and they don’t all point in the same direction.”  So he takes a closer look at the alternative measures and how likely they are to be capturing true labor market tightness.  He does so by looking at how well various wage measures correlate with the movement of three other economic indicators that strongly impact wage growth:

i. The “unemployment gap,” which is the difference between current unemployment rate and the “natural rate” of unemployment;
ii. The “labor market differential” from TCB’s Consumer Confidence survey, which is the percentage of respondents who say jobs are plentiful minus the percentage who say jobs are scarce; and
iii. The core consumer price index (CPI), which is a measure of inflation. 

Four of the wage measures that Gad evaluates are shown below.

Gad’s regression analysis indicates that the Atlanta Fed Wage Growth Tracker and the Employment Cost Index (ECI) (shown in blue and green respectively) perform best in terms of being more closely correlated with our three measures of wage growth drivers.  The other two wage measures – average hourly earnings and median weekly earnings (shown in grey and purple) – do not correlate as well with tightness in the labor market. 

From the graph it’s apparent that the blue and green lines are on a pretty steady upward trend over the past year.  Put another way, after sorting out the best measures of wage growth from the not-as-good measures, we “can see clearly now” that wages are rising.  (Sorry, I couldn’t resist—that song just popped into my head when I read Gad’s blog.)

What distinguishes the best measures for predicting labor market tightness from the others?  Gad explains that the top-performing “Wage Growth Tracker” of the Atlanta Fed likely does well because “it is the least impacted by changes in composition [of its sample], as it tracks wage growth for the same individuals over time.”  In fact, the Wage Growth Tracker is constructed using microdata from the household-level Current Population Survey—a database jointly produced by the Census Bureau and the Bureau of Labor Statistics (BLS).

What about the second-best measure in Gad’s analysis, the Employment Cost Index (ECI) produced by the BLS?  As the BLS explains, the ECI “measures the change in the cost of labor, free from the influence of employment shifts among occupations and industries.”  In other words, even though the ECI is not a household-level survey, it samples from business establishments in a way that controls for the mix of occupations and industries.

On the other end of the spectrum are measures such as the other two shown in the chart:  average hourly earnings and median weekly earnings.  What do those measures that are less highly correlated with labor market tightness have in common?  They are both measures that average together all workers from all industries and all occupations.  If the mix of industries and occupations is changing over time, then these very aggregate wage measures will tend to pick up this “compositional” effect—that is, the effect of the changing mix of jobs by industry and occupation that pay different levels of wages.  That compositional effect may affect aggregate measures like average hourly earnings as much or more than the movement of wages within specific types of jobs.  And think about it:  increases in service-sector, part-time, and other forms of “non-standard” employment (both in numbers and in share of total jobs) may bring with them an economy-wide trend of reduced wages and benefits—as I pointed out in my blog last week.  This does not mean that particular employees within particular companies are experiencing stagnating wages as much as implying that the “average” or “typical” work arrangement in our economy is changing.  Thus, these macro wage measures that aggregate at a very high macro level across many individuals and occupations may not be the best indicators of the actual tightness of the labor market. The increase in the number of people in lower-wage jobs may be obscuring the wage growth in particular jobs, within these aggregate measures of wages.

By the way, this is just one particular part of the economy’s movement toward a “new normal” and demonstrates why tracking and understanding even the macro economy going forward will require us to pay a lot more attention to micro-level economic data.

So what Gad is really telling us in his blog post is that he’s removed the “dark clouds” and “obstacles” that may have blinded him from seeing true wage growth.  Now that he “can see clearly now” using these better-performing labor market indicators, he can report that “it’s gonna be a bright, bright sunshiny day”…for wages.  ☺