Is wage growth accelerating or isn’t it?
The appearance of stagnant wages across the country — despite falling unemployment rates and a growing economy — has been the source of a lot of debate among economists and everyone else interested in the trajectory of their paychecks.
However, the wage growth story is a nuanced one. While the national average wage growth might be going sideways, that’s not be reflective of wage growth within individual industrials and job levels.
One reason why this isn’t translating in the national averages is because the national averages don’t adjust for the fact that low-wage jobs are on the rise.
“If the data are recalculated using fixed pre-crash employment weights, wage growth is now running at about 2.3% year-over-year, a bit more than the 2.1% increase in the published numbers in the year to March,” Pantheon Macroeconomics’ Ian Shepherdson notes. “Moreover, as our first chart shows, the trend in the fixed-weight series clearly is accelerating, unlike the flat trend in the published numbers.”
Check out the darker blue line.
Shepherdson believes the national averages could soon get a boost as growth in higher wage jobs picks up.
“Right now, we think developments in the labour market point to the gap narrowing over the next year, because patterns of job growth are shifting, and the rate of growth of payrolls in higher wage sectors is catching up with growth in lower wage sectors,” he said.
All of these dynamics are critical to understanding what’s really going on in the labour market. It also prepares us for Thursday’s quarterly employment cost index (ECI) report.
“This distinction matters, because the wage and salary data in the employment costs index, which is the Fed’s preferred measure of wage pressure, is adjusted for shifts in employment by sector and occupation,” he said. “The ECI measure of private sector wages rose at an average annualized rate of 2.7% in the second half of last year, and we are very keen to see what happened in the first quarter of this year. A continuation of the recent quarterly pace would lift the year-over-year rate of increase to 2.8%, the highest for seven years and double the 1.4% low recorded in 2009.”
A jump in the ECI could also put pressure on the Fed to tighten monetary policy sooner than later.
“This would be enough, in our view, seriously to damage the doves’ argument that the labour market remains so slack that the Fed can safely leave monetary policy settings at emergency levels.”