Wages Are Growing Faster Than You Think

A 0.1% annual rise turns into 1% when adjusted for inflation, benefits and the changing labor force.

By David R. Henderson. Excerpts:

"Standard wage data show that between the spring of 2017 and the spring of 2018, real wages in the U.S. increased only 0.1%. But there are three major problems with these data. First, they don’t account for fringe benefits, which are an increasing proportion of employee pay. Second, standard wage data use an index that overstates the inflation rate. Third, each year the composition of the workforce changes, as older, higher-paid workers retire and young, lower-paid workers enter the workforce.

A study released this month by the White House Council of Economic Advisers addresses these three biases and concludes that real wages grew by 1% in 2017-18, not the measly 0.1% reported in the wage data."

"An alternate measure of inflation [to the CPI], the personal- consumption-expenditures price index, while also imperfect, is a better measure of inflation. Economists at the Federal Reserve prefer the PCEPI to the CPI. Using the PCEPI adds 0.5 percentage point to the 2017-18 growth of real wages."

"The Census Bureau estimates that 3.57 million people turned 65 in 2017, compared with 2.68 million in 2010. Taking account of the decline in older, higher-paid workers and the increase in younger, lower-paid workers, the CEA estimates that this “composition factor” added 0.3 percentage point to real wage growth from 2017-18."

"Real after-tax wages increased 1.4% between 2017 and 2018, according to the CEA study."