A quick look at recent wage growth

January 20th, 2016 at 5:52 pm

One can decompose the growth in real (inflation-adjusted) weekly earnings into the parts due to:

a) hourly wage growth
b) weekly hours worked
c) inflation

So, the growth in real weekly earnings = a + b – c, or nominal hourly wage growth plus hours growth minus the rate of inflation.

Now that we have inflation data for December, we can break apart real weekly earnings growth for 2015 into these components and compare it to recent years, in this case for blue-collar workers in manufacturing and non-managers in services. I’ve found this “production worker wage” to roughly track the pay of middle-wage workers. The black dot is the sum of the three building blocks.

Right off the bat, you see that after going nowhere for three years, real earnings gains rose in both 2014 and 2015, by 1.8% and 1.4%, respectively, for these middle-wage earners. Nothing to get exuberant about, but welcomed real gains for sure.

The other point is that it’s not so much faster hourly wage growth nor a lot more weekly hours driving the increases. It’s lower inflation. In response to the tightening job market, hourly wage growth picked up a bit last year, growing 2.4% in 2015 as opposed to the ~2% of the prior two years. But the big difference was the sharp decline in the CPI. Had prices risen at, say, 2%–a more normal pace–real weekly earnings would have been flat.

You can view that as a transfer of riches from Middle Eastern oil sheikhs to guys and gals on the production line, providing health care, teaching kids, and so on, which is fine by me. Or you can recognize that nominal wage growth is only now starting (maybe) to pick up its pace a bit, suggesting that (maybe) workers are gaining a little bargaining power as employers compete. And you can hope the Fed sees no reason to stop it.


Source: BLS

Source: BLS


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3 comments in reply to "A quick look at recent wage growth"

  1. lower middle class says:

    “You can view that as a transfer of riches from Middle Eastern oil sheikhs to guys and gals on the production line…” Are there many sheikhs in Canada and Mexico?

    Personally, I view it as a transfer from oil producers to landlords and medical care providers. I hope you’re right about nominal wage growth. I am not optomistic the FED will restrain themselves from raising rates for fear of the ZLB.

    • Procopius says:

      I don’t remember their names, but two or three of the most violently inflation-fearing advocates for raising rates now, now, now argued that it was necessary because of that they openly referred to as “wage inflation,” i.e., improving real wages. I think this mind-set is very powerful among the rich bankers who hang out with rich factory owners.

  2. Smith says:

    I don’t see any recovery at all in wages, or labor bargaining power. All the red bars look about the same height. The only improvement came from lower inflation brought about by lower oil prices that began in earnest Fall 2014 into Winter 2015 and beyond. An important part of that improved American technology, i.e. fracking. The economy will reap the benefits as long as oil prices remain low, but since they can’t drop a similar amount anymore, inflation will resume at 2% along with wage stagnation. The slowdown in China may keep oil prices low, higher oil prices would eat up the past two years gains. That’s without a recession probably out there somewhere, delayed presently because we’re still not out of the last one. Thus there is still pent up demand, lack of froth, and less debt.