When I say “wage,” you say “mash-up!” When I say “wage,” you say…

May 12th, 2015 at 8:24 am


I don’t know what I’m getting all excited about. My quarterly five-wage mash-up series through 2015q1 shows nominal wage growth pretty much plodding along at the same 2% it’s been stuck at for years.

The plot shows the first principal component (PC) of the yearly changes in the five wage and compensation series listed below, using quarterly data since 1982. PC analysis is not “politically correct” (though it is careful not to insult any individual wage series just because it’s different). It’s a technique to summarize a bunch of related data series in a way that pulls out their common signal. Its utility here is that it gives back a weighted average of a number of quarterly series in a way that downweights noise and pulls out signal.



If you squint hard you can maybe see some tiny uptick in trend at the end of the series but nothing to write home raise rates about. Remember, this flat trend is occurring amidst an unemployment trend that is allegedly within spitting distance of the Fed’s full employment rate of 5.1%. The current, official jobless rate is 5.4% but our estimate of Andy Levin’s more accurate rate, which adjusts for a) distance from full employment, b) the still elevated but falling number of involuntary part-timers, and c) the part of the missing labor force that we think represents slack (potential workers who would come back in if demand were stronger) is 6.8%.

Cutting to the chase, given the downward bias in the jobless rate and the fact that inflation continues to well undershoot its 2% target (which is also consistent with the bias in the unemployment rate), a central bank focused on slack would be wise, IMHO, to target wage growth. Which would lead them to keep their powder dry for now.

The five series are:
Employment Cost Index: Hourly Compensation
Employment Cost Index: Hourly Wages
Productivity Series: Hourly Compensation
Median Weekly Earnings, Full-time Workers
Average Hourly Earnings, Production, Non-Supervisory Workers

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5 comments in reply to "When I say “wage,” you say “mash-up!” When I say “wage,” you say…"

  1. Unlearner says:

    But discriminating against series because they’re different is just what PCA does. And then you use the slur, “noise.”

  2. Jurassic Carl says:

    –Here’s something new out of the Chicago Fed on the natural rate of unemployment.

    –On a more practical level, here’s a great opinion on labor mismatch and our broken job matching practices.

    -Lastly, here’s a philosophical question for the day:

    If more and more people are not counted as unemployed, do they even exist?
    (i.e., Will they ever mean anything to policymakers?)

  3. Smith says:

    Please, please, do not give nominal wage increase without pointing out after core inflation, it’s basically zero.
    Except for this year, nominal isn’t nominal because inflation shows a zero for last 12 months (core + energy and food) after oil prices dropped drastically late 2014. But you’ve only gotten 5 months worth of that actually (since the price drop started in January). Up until then you had nothing (a 2% nominal increase in wages and 2% inflation). Since core inflation is running 1.8%, unless energy prices continue to drop, it’s a one time stimulus package worth $58 billion thanks to fracking and still underutilized economies. ($58 B computed as 2% * $17 trillion GDP * 5 months/12 months a year, deduced from the resulting 0% inflation past 12 months as of December 2014 offsetting the previously measured 2% trend)

    But a 2% nominal wage increase means there is $140 billion missing. How? GDP grows 3% as employment expands about 2% plus average 1% productivity increase (.8% average last 4 years, hence .8 * $17 trillion = 140)

    Since there are roughly 140 million workers, everyone could get a $1,000 raise. (That would be 2% for a median income of $50,000, that’s in addition to the 2% nominal raise usually offset by 2% inflation) Or the top 10% could get take all of it and get $10,000 (they make over $145,000 so it’s a hefty 7% or less raise) Or if the 1% grab it all they get $100,000 (they’re making upwards of $500,000 so why do they need or get a 20% raise?) Finally the .1 percent would get a $1 million, but only making $1,750,000 on the low end. Even the .01 percent only enter that realm at $16 million, grabbing all would nearly double adding $10 million, the .001 percent likewise grabbing all $140 billion would again double their income in most cases gaining another $100 million.

    So where is the money going? Retained corporate profits? It’s easy to see everyone could do well just splitting the pot geometrically, not that I think everyone getting $500 while the top 10% get $5,000, the 1% $50,000, etc
    But that’s not even happening, yes?
    Hit the 10 year link to get reasonable and meaningful views of these
    Labor Productivity
    GDP Q rate of change over preceeding
    Employment (make quarterly for comparison)

    For further reading, see also

    • Smith says:

      Follow the money. More thoughts on missing $140 billion, low oil price stimulus, wage mash-up.

      1) Productivity
      Where are the productivity increases going?

      2) Oil price drop
      Various interpretations of oil price drop say it adds .5% increase in GDP because savings don’t get passed on to consumers (companies don’t suddenly lower prices 2%), some of the savings are saved, not spent, and domestic regions dependent on oil producing may see less growth (Texas, North Dakota).
      Even .5% is a huge stimulus, seemingly under reported, and bolsters Europe even more?

      3) Lasting effects and double edged
      Low energy prices are the gift that keep on giving, as long as they stay low. In terms of real wage increases, it’s effect is a one time deal, but it’s still like having a stimulus of $50 to $200 billion every year until prices go back up. When oil prices climb again, so will headline inflation, increasing pressure on the Fed to raise interest rates at the exact moment they shouldn’t. Energy price hikes hit consumers, slow economy while raising inflation, and if combined with interest rate hikes spell trouble.

      Meanwhile, again we ask where all this money is going now, from productivity and energy savings. Only the direct costs of energy (gasoline and in the north, heating oil) find their way via consumer to the average citizen. Whither the other $200 billion? And what happens when oil rises again?