Tuesday, June 12, 2018

Wage Growth in a Tight Labor Market

Much has already been written about the employment report for May 2018 that was published on Friday, June 1. The unemployment rate, like your friendly mole, once again dug deeper and went to an 18-year low of 3.8%. This means that the labor market is growing tighter, which means that firms are finding it harder to find the right employees. There are many articles being written now about this business challenge as firms use innovative ways to try to attract new employees or to hold on to existing ones. Of course, a common approach to attracting and keeping workers is raising wages and benefits. 

Wages, therefore, become a critical economic variable these days. This week I decided to look at wage behavior in the USA to see if there are signs of firms using wages to ameliorate labor market tightness. The graph at the bottom looks at monthly percentage changes in average earnings for all employees. 

Reading graphs is definitely an art form. I ain't Picasso but let's give it a shot. Each dot on this graph records how much earnings grew in that month. If you go to the very last dot on the graph, it says that in May of 2018 earnings grew by 0.298 compared to the value in April of 2018. The one-month percentage change was 0.298%. For sake of our eyeballs, let's round up and call that a one-month increase of about 0.3% in May. If that one-month increase lasted for a full year, then wages would increase by about 3.6%. 

That's a big if and is only suggested so that we can put the one-month gain into an annual perspective. If Lebron scored 12 points in the first quarter of a game, he scored 12 points! But we could say something like -- dude, that's like scoring 48 points in a whole game. Wow. Groovy. He may or may not score 48 in that game but the 48 gives us another way of understanding the 12 he did score in Q1. 

Whew. I am thirsty. So if you read the above, you know that the 0.298 increase in May of 2018 is about a 3.5% annualized increase. That sounds pretty good. If the cost of living went up by 2% in May, then you might be happy that your wages grew faster than your expenses. 

The reason I placed the whole graph below is that we can evaluate the most current increase better by looking at past changes. This graph has monthly ups and downs from April of 2006 to May of 2018, so we can compare over a 13-year period. My task today is to evaluate the 0.298 of May 2018. 

Is it the highest point on the graph? 
     Absolutely not. Just in the last couple of years there were many months that had stronger growth in earnings. 

Is it the lowest point on the graph? 
     Absolutely not. There are even more months in which earnings grew much slower than 0.298. 

Is there any pattern to the monthly changes? 
     It looks like whack-a-mole to me. Most ups are followed swiftly by downs and vice versa.

Do you observe an upward or downward trend in the dots? 
     From about April 2006 through June 2010, there seems to be a downward trend. That is, on average, wage growth seemed to decline. Wages were growing but at a slower pace.  
     But from June 2010 to about October 2011, the wage growth picked up. From my eyeball, it appears that the average monthly percentage change during that time was about 0.2 or an annual rate of about 2.4%. 
     Then from 2012 to now, there appears to be no discernible trend change in earnings. For six years, we got ups and downs around a mean that suggests wage change at about 2.4% per year. If you removed the crazy negative data point in October of 2017, you might see some increase in trend starting around October of 2016. Of course, you might also see pink elephants.

Why go through all this madness? Because there is nothing like the data. You will see a lot of interesting and intelligent articles about wage change in the USA. Smart people will discuss the May data point and tell you that the 3.5% growth in May is higher than the 2.4% rate that prevailed over the last eight years. These folks may want to convince you that wages are spiraling higher -- and maybe they are. But looking at this graph from beginning to end does not make me very confident that we are on a new upward trend. I remain skeptical that the 3.5% means much of anything. I wonder what we will learn in July about June. 




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