Stagnant Wages: Fact or Fiction?

From Salim Furth of Heritage. Excerpts:

"Abstract

Wages have grown over the past few years at rates similar to historical trends. Even when including the Great Recession, the average annual growth rate has been positive. The frequently repeated claim that wages are “stagnant” is at odds with six measures of wages and compensation, which indicate that hourly and weekly wages have grown about 0.9 percent per year since the beginning of 2013. Wages are certainly not booming, however, and policymakers can increase real wages by reforming laws and regulations that artificially raise prices of consumer goods.
 

Recent data show that wages have been growing recently at rates comparable to their long-term trends. Measuring average wages accurately is more difficult than it sounds, so this paper looks at six metrics of wage and compensation to present a complete picture.

Since the beginning of 2013, wages have grown about 0.9 percent per year. Since 2006 (and thus including the recession), annual growth has been around 0.5 percent. Over longer horizons reaching back to 1960, wages and compensation have usually grown between 0.7 percent and 1.7 percent per year. Thus, recent wage trends are typical of the modern era, although modestly lower than average.

Are Wages Stagnant?

A widely repeated narrative is that wage growth in recent years has been terrible. Many economists and journalists have written about how slowly wages are growing—and have often written that they are not growing at all.[1] Yet six common indicators show modest but steady growth in the past two years and even in the past eight years. Why the discrepancy?

One reason that wages appear to be growing more slowly is that inflation has been low, especially since oil and gas prices have dropped. In the past two years, inflation has averaged just 1.16 percent per year. This is less than half the rate of inflation from 2000 through 2007, and it means that fewer people are receiving nominal raises.

However, what matters for well-being is the real (inflation-adjusted) value of wages.[2] Low inflation means that receiving a nominal raise of 2 percent in 2014 increases a worker’s real income more than a 3 percent raise would have in 2004.

The analysis in this paper uses the Personal Consumption Expenditures (PCE) deflator, which is the most accurate measurement of the general cost of living. The other common inflation measure, the Consumer Price Index (CPI), covers fewer consumer goods and is known to be biased upward.[3]

Since 1960, the gap between the two measures has averaged 0.5 percent per year, although in the past few years it has narrowed to about 0.25 percent.[4] Thus, if someone reports current wage growth of 0.7 percent using the CPI, the same data would show 0.95 percent growth using the PCE.

Wage Growth in 2013 and 2014

The consensus among six common measures of compensation (see Box 1) is that wages have been growing at around 0.9 percent per year since the beginning of 2013. At this rate, average wages will rise 31 percent in 30 years.

The six wage metrics cover slightly different concepts. Chart 1 shows how the different metrics report recent wage growth.

The data show no disagreement between hourly and weekly metrics. The metrics that better represent working-class wages performed slightly better than the metrics that cover all workers.

The two measures of hourly compensation were the outliers, reporting 0.65 percent and 1.5 percent annualized growth, respectively.

While 0.9 percent annual wage growth is nothing to celebrate, it is much better than zero growth, and it is not stagnant by historical standards. Like employment and gross domestic product (GDP), wages were slow to recover from the Great Recession and earn no praise for the policies enacted in response to the recession. 

 

Wage Growth Since 2000

Although current wage growth is in line with historical averages, wages may be just recovering ground lost to the recession.

Wage growth since 2006—the first year in which all six data sources are available—has been lower than most historical averages, but still positive. Four of the measures are clustered around 0.45 percent annualized growth, while two measures of hourly earnings offer an optimistic dissent.

Going back further to include two recessions and the 2000s expansion, wage growth has been about 0.8 percent per year, in line with historical averages. This would yield a 27 percent increase in average wages over 30 years. In this period, compensation growth was highest, and the two measures of weekly wages were lowest.[5] Commerce Department data confirm that the non-wage share of compensation shrank in the late 1990s and then grew from 2000 to 2005.[6]

Wage Growth Since 1960

How strong has wage growth been historically? Less data are available for earlier decades, and the available data are less in agreement. Chart 2 shows growth periods for several measures of wages and compensation since 1960 or their earliest availability.

From 1960 to 2007 (both business cycle peaks[7]), hourly compensation grew by 1.8 percent per year. Splicing together two measures of wages,[8] I find that wages grew 1.0 percent per year from 1964 to 2007.



During the first part of this era, before 1980, the gap between compensation and wage growth was large: Hourly compensation grew 2.0 percent per year, and wages grew 0.7 percent per year. About one-third of the gap is explained by the rapid growth of non-wage benefits. In 1964, 10.3 percent of compensation was non-wage; in 1980, it was 15.5 percent. However, two-thirds of the gap cannot be easily explained.

From 1980 to 2007, hourly compensation and weekly wages grew side by side. Compensation grew 1.5 percent per year and weekly wages 1.2 percent per year, with the gap substantially explained by the continued growth of non-wage compensation. However, median weekly earnings from the Current Population Survey (CPS) rose only 0.7 percent per year.[9]"

Why Do Wages Seem Stagnant?

Given that straightforward data unanimously show steady, historically typical wage growth over the past few years, it is surprising that a cottage industry has grown up around making wages appear to be stagnant. Other analysts arrived at their claims that wages are stagnant by:

• Inviting readers to implicitly compare average to individual wage growth. As individuals gain experience, their own wages rise faster than the national average. Because people enter the labor force with low wages and retire with high wages, the average grows much more slowly than most individuals’ experience. Wage growth of 1 percent for an individual might be stagnant, but for the economy it is typical.
• Using an inferior inflation measure. Most wage growth pessimists use a CPI series, which systematically understates wage growth. Using the wrong measure can make wage gains sound smaller, but it should actually make the current era look better than it is compared with the past because the gap between the CPI and PCE has fallen in the past several years.
• Using different starting points. In one graph[13] by the Center for American Progress, wage gains are dated from February 2010, the trough of the Great Recession. Recessions can do strange things to average wages since low-wage individuals are more likely to lose their jobs. From February 2008 to February 2010, wages grew 1.6 percent per year, but that was in the context of the worst labor market collapse in a generation.
• Conflating household income with individual wages.[14] The decrease in labor force participation lowers incomes independently of wage trends. During an era when fewer people are working, wages will grow faster than household incomes. Some policies that would raise wages, such as increasing the minimum wage, would decrease employment, with an ambiguous effect on total income."