Tuesday, May 29, 2018

Are Wage Gains Ready to Skyrocket?

Most people take for granted that wages have shown lackluster growth over the last 20 years or so. So I put my data cap on and starting looking at numbers. My first takeaway is that there are way too many numbers. We might want to know how wages have kept up with productivity. That seems reasonable. But then one needs to find companion series for wages and productivity, so we can compare apples with apples. That can be done but do we want to compare these series for all workers? For all manufacturing workers? For medium-income workers? Over how many decades?

Another comparison of wages could focus instead on how wages changed compared to prices – that is, did wages keep up with inflation? Again, there are many indicators from which to choose – various measures of wages and even more measures of inflation. To makes matters even more challenging – some of the series go back to 1929 while others just got started in 2006.

What I am saying here if it isn’t obvious is that it is time for a nice cold JD. It is also time to make some decisions. No matter which choice I make some of you will want to scold me. But I made a decision anyway. I decided to focus on the years from 1968 to 2017. Going back to 1968 means we have a rich enough data set so that we can put today’s low inflation numbers in perspective with past times when US inflation was higher. I also decided to use the CPI as my inflation variable. Earnings of Production and Nonsupervisory Workers in the Business Sector is my measure of wages.

What I examined is how earnings kept up with inflation during the past half-century. To do this I calculated three times series –  % change in earnings (Edot), % change in prices (Pdot), and % change in the buying power of the earnings (calculated as the first series minus the second one (Edot minus Pdot)). For example, in 1970 the % change of earnings was 6.1%. Prices rose by 5.6%. Therefore the buying power of the earnings rose by 0.5% (6.1-5.6) in 1970. 1970 is an example of a year when earnings did quite well. The wage increase of these production and nonsupervisory workers was larger than the increase in the cost of living.

As I look down my table (below) I notice there are lots of years when the buying power of earnings was positive while there were also years when workers did not keep up with inflation (buying power of earnings was negative). When the buying power of earnings was negative – it meant that workers were getting behind – and that they might at some point want to catch up. 

The earnings buying power went down considerably from 1973 to 1975 and then again from 1978 to 1981. In those years inflation was hitting double digits and despite some good years of earnings growth – these earnings just couldn’t keep up with inflation. In 1980 earnings rose by almost 9% but since inflation was 12.5% workers fell behind. And strangely enough, it was not until 1995, after the inflation rate had fallen considerably that earnings began rising faster than inflation. The years 1995 to 2002 were catch-up years. During those years earnings rose a total of about 10 points more than inflation.   

Between 2003 and 2012 there was no real pattern. But then between 2013 and 2017 there was a very clear pattern – and brace yourself for this – wherein inflation  generally stayed below 2% per year – wages of production and non-supervisory workers were rising by about 2.4% per year. Thus, earnings were catching up as the buying power of earnings increased. 

There are lots of ways to go from this point. But let’s not forget one thing. While workers always want higher wages – the thrust for higher wages is often driven by how far wages stretch to buy goods and services. This data suggests that while there have been times when the buying power of the wages declined (in the 1970s and then from the mid-80s to the mid-90s) – the last 15 years cannot be classified as a time when inflation robbed workers of their buying power. Especially the last 15 years show just the opposite. Workers might not love the size of their wage increases – but these increases have been well above the inflation rate. And therefore, there is no clear pent-up explosion of wage increases looming around the corner.

As I said above, there are lots of ways to go from here. I am not saying that all workers are just fine. I am not saying there are no labor market issues to deal with. What I am saying is that the rate of growth of earnings compared to the cost of living is important for understanding future wage and price growth. The earnings of production and nonsupervisory workers in the USA might not be growing rapidly but they have, of late, been growing faster than the cost of living. That needs to be factored into our forecasts for the future. 

Table
Earnings
CPI
Edot -
Year
Dec
Dec
Edot
Pdot
Pdot
1968
3.11
35.5

1969
3.30
37.7
6.1
6.2
-0.1

1970
3.50
39.8
6.1
5.6
0.5

1971
3.73
41.1
6.6
3.3
3.3

1972
4.01
42.5
7.5
3.4
4.1

1973
4.25
46.2
6.0
8.7
-2.7

1974
4.61
51.9
8.5
12.3
-3.9

1975
4.87
55.5
5.6
6.9
-1.3

1976
5.23
58.2
7.4
4.9
2.5

1977
5.61
62.1
7.3
6.7
0.6

1978
6.10
67.7
8.7
9.0
-0.3

1979
6.57
76.7
7.7
13.3
-5.6

1980
7.13
86.3
8.5
12.5
-4.0

1981
7.64
94.0
7.2
8.9
-1.8

1982
8.02
97.6
5.0
3.8
1.1

1983
8.33
101.3
3.9
3.8
0.1

1984
8.61
105.3
3.4
3.9
-0.6

1985
8.87
109.3
3.0
3.8
-0.8

1986
9.01
110.5
1.6
1.1
0.5

1987
9.28
115.4
3.0
4.4
-1.4

1988
9.60
120.5
3.4
4.4
-1.0

1989
9.98
126.1
4.0
4.6
-0.7

1990
10.35
133.8
3.7
6.1
-2.4

1991
10.64
137.9
2.8
3.1
-0.3

1992
10.90
141.9
2.4
2.9
-0.5

1993
11.18
145.8
2.6
2.7
-0.2

1994
11.47
149.7
2.6
2.7
-0.1

1995
11.81
153.5
3.0
2.5
0.4

1996
12.25
158.6
3.7
3.3
0.4

1997
12.76
161.3
4.2
1.7
2.5

1998
13.22
163.9
3.6
1.6
2.0

1999
13.70
168.3
3.6
2.7
0.9

2000
14.29
174.0
4.3
3.4
0.9

2001
14.75
176.7
3.2
1.6
1.7

2002
15.21
180.9
3.1
2.4
0.7

2003
15.47
184.3
1.7
1.9
-0.2

2004
15.86
190.3
2.5
3.3
-0.7

2005
16.36
196.8
3.2
3.4
-0.3

2006
17.05
201.8
4.2
2.5
1.7

2007
17.69
210.0
3.8
4.1
-0.3

2008
18.38
210.2
3.9
0.1
3.8

2009
18.84
215.9
2.5
2.7
-0.2

2010
19.22
219.2
2.0
1.5
0.5

2011
19.56
225.7
1.8
3.0
-1.2

2012
19.89
229.6
1.7
1.7
-0.1

2013
20.34
233.0
2.3
1.5
0.8

2014
20.73
234.8
1.9
0.8
1.2

2015
21.25
236.5
2.5
0.7
1.8

2016
21.78
241.4
2.5
2.1
0.4

2017
22.31
246.5
2.4
2.1
0.3



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