What to Watch on Jobs Day: Putting wage growth in perspective
While payroll employment growth has continued to be more than fast enough to absorb working age population growth as well as workers idled by slack demand in previous years and the unemployment rate is holding at 4.1 percent, other economic indicators such as the labor force participation rate, the prime-age employment-to-population ratio, and wage growth resemble an economy with a fair amount of remaining slack. My attention this jobs day and in the discussion below is wage growth.
Last week, I released a paper on the State of American Wages in 2017, with comparisons to earlier periods as well as analysis by gender, race, and educational attainment. Key findings include a pickup in wages for the lowest wage workers over the last couple of years due in part to more workers finally feeling the effects of the growing economy in their wages plus state-level minimum wage increases occurring in states where about half of all workers reside. On the downsides, much of the 2000s and 2010s have been characterized by growing wage inequality and slow or stagnant wages for many. Black-white wage gaps have worsened over the 17-year period and the bottom 50 percent of college degreed workers have lower wages today than in 2000.
Tomorrow, the latest wage growth numbers from the Current Employment Statistics (CES) will come out. The paper I just referenced primarily examined the wage data found in the Current Population Survey Outgoing Rotation Group (CPS-ORG), which allows wage comparisons across the wage distribution and by demographic characteristics. For a read on the labor market and an assessment about whether wage growth reflects an economy at full employment, it’s important to look at nominal wage growth. What’s clear from both surveys, using different metrics (median versus average and total private versus production/non-supervisory) is that nominal wage growth is still below levels consistent with the Federal Reserve’s inflation target and with estimates of potential productivity growth—a sign that the economy still has considerable slack.
You can see the latest year-over-year comparisons in wage growth in the figure below. Depending on the data set and specific statistic, wage growth between 2016 and 2017 ranged between 2.3 percent and 2.6 percent. Strong wage growth should be above 3.5 percent to reflect the Fed’s target inflation rate of 2.0 percent plus potential productivity growth (around 1.5 percent). By any measure, nominal wage growth continues to fall short. It seems clear that employers and workers alike know that there are still workers waiting in the wings—every month about 2/3 of the newly employed go straight from out of the labor force into a job so it’s no surprise that the unemployment rate might be overstating the strength of the economy—and because of that labor market slack, workers do not have the leverage to bid up their wages.
The CPS exhibits more year-to-year volatility than the CES: CES and CPS nominal wages, year-over-year percent change, 2000–2017
| Year | CPS median wage | CPS average wage | CES all private-sector employee wages | CES private-sector production and nonsupervisory employee wages |
|---|---|---|---|---|
| 2000 | 2.5% | 4.7% | 3.9% | |
| 2001 | 5.5% | 4.7% | 3.8% | |
| 2002 | 1.6% | 3.2% | 2.9% | |
| 2003 | 3.9% | 2.6% | 2.7% | |
| 2004 | 2.7% | 2.7% | 2.1% | |
| 2005 | 2.4% | 2.6% | 2.7% | |
| 2006 | 3.9% | 3.8% | 3.9% | |
| 2007 | 1.1% | 3.9% | 4.0% | |
| 2008 | 4.4% | 4.1% | 3.1% | 3.8% |
| 2009 | 1.6% | 2.1% | 2.8% | 3.0% |
| 2010 | 0.2% | 1.1% | 1.9% | 2.4% |
| 2011 | 0.3% | 0.8% | 2.0% | 2.0% |
| 2012 | 1.5% | 2.8% | 1.9% | 1.5% |
| 2013 | 2.2% | 1.8% | 2.1% | 2.1% |
| 2014 | 1.3% | 1.1% | 2.1% | 2.3% |
| 2015 | 1.4% | 4.1% | 2.3% | 2.1% |
| 2016 | 4.4% | 3.6% | 2.6% | 2.5% |
| 2017 | 2.4% | 2.6% | 2.5% | 2.3% |
Source: EPI analysis of Current Population Survey Outgoing Rotation Group microdata and Current Employment Statistics data
But, trends in wage growth have not always been consistent between the two surveys in a given year. From 2015 to 2016, the CPS-ORG showed relatively strong growth in nominal median hourly wages of 4.4 percent. At the same time, the CES showed relatively weaker wage growth for private-sector workers and production/nonsupervisory workers over the same year, averaging 2.6 percent and 2.5 percent, respectively. This lower level of growth registered in the CES data is notably below levels consistent with Federal Reserve targets for inflation and long-run trend productivity growth. The 4.4 percent growth in the CPS-ORG was particularly striking in a year in which inflation rose only 1.3 percent. And this level of growth, if it truly reflected the accurate state of the American labor market, would have been highly suggestive of a stronger economy than is indicated by other labor market statistics. Again, as workers become scarcer, employers have to pay more to attract and retain the workers they want.
But, there’s some evidence that the CPS-ORG’s stronger reading of the state of the economy between 2015 and 2016 may have roots in the greater statistical volatility found in the CPS-ORG relative to the CES. You can see that volatility in the figure above. Given the larger sample size and the benchmarking of CES employment to unemployment insurance tax records, it has been well established that the CES is the better survey for assessing overall employment growth. Considering that the wage data from the CPS-ORG comes from a quarter sample of the CPS, it is clear that if the CES survey is better on measuring employment changes because if limited data is related to statistical volatility for the CPS, then the problem with comparable wages is likely to be worse. When we smooth out the CPS, using a three-year moving average, you can see that both surveys tell a more consistent story (shown in the figure below).
When the CPS is smoothed using a three-year moving average, the CPS and CES exhibit similar trends: CES wages and three-year averages of CPS wages, year-over-year percent change, nominal, 2000–2017
| Year | CPS median wage, 3-year average | CPS average wage, 3-year average | CES all private-sector employee wages | CES private-sector production and nonsupervisory employee wages |
|---|---|---|---|---|
| 2000 | 3.9% | 4.7% | 3.9% | |
| 2001 | 4.4% | 4.6% | 3.8% | |
| 2002 | 3.2% | 4.2% | 2.9% | |
| 2003 | 3.7% | 3.5% | 2.7% | |
| 2004 | 2.7% | 2.8% | 2.1% | |
| 2005 | 3.0% | 2.6% | 2.7% | |
| 2006 | 3.0% | 3.0% | 3.9% | |
| 2007 | 2.5% | 3.4% | 4.0% | |
| 2008 | 3.1% | 3.9% | 3.1% | 3.8% |
| 2009 | 2.4% | 3.3% | 2.8% | 3.0% |
| 2010 | 2.0% | 2.4% | 1.9% | 2.4% |
| 2011 | 0.7% | 1.3% | 2.0% | 2.0% |
| 2012 | 0.7% | 1.5% | 1.9% | 1.5% |
| 2013 | 1.4% | 1.8% | 2.1% | 2.1% |
| 2014 | 1.7% | 1.9% | 2.1% | 2.3% |
| 2015 | 1.6% | 2.3% | 2.3% | 2.1% |
| 2016 | 2.4% | 2.9% | 2.6% | 2.5% |
| 2017 | 2.7% | 3.4% | 2.5% | 2.3% |
Source: EPI analysis of Current Population Survey Outgoing Rotation Group microdata and Current Employment Statistics data
Looking only at last year’s CPS, one might be tempted to report a slowdown in wage growth from 2016 to 2017, but I would suggest attributing much of this “slowdown” to a reversion to the mean in this jumpier survey. The reversion to a very close match in wage growth of the CES to the CPS is merely a matter of odds; however, it allows us to tell a rather conveniently consistent story of wage growth. While wage growth was stronger in the CPS from 2015 to 2016, much of that growth can be attributed to statistical volatility as opposed to genuine wage growth for workers. The second figure shows wages moving in the right direction but decidedly not exceeding target inflation plus productivity growth for the median worker.
Wage growth registered by the CPS between 2015 and 2016 may have been a bright spot, but it may not be as real as it appeared and more recent readings, along with smoothing of this series, continues to indicate that wage growth today remains below levels consistent with a full employment economy. This tells us to take all measurement of wage growth with a grain of salt, including year-over-year changes in the nominal wage growth data released tomorrow on job’s day. Making an accurate assessment of the state of wage growth is essential to a complete understanding of labor market dynamics and to determining how close the U.S. economy may indeed be to full employment, but such an assessment has to be made over time and it’s important to remember that wage growth doesn’t need to simply hit 3.5 percent in a given month to declare that the job is done on wage growth. It should exceed 3.5 percent for a substantial amount of time for workers to begin to claw back losses in the labor share of income they’ve felt during and since the Great Recession.
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