The best measure of labor market recoveries: March 2016 update

by New Deal democrat

The best measure of labor market recoveries: March 2016 update

In my opinion the best measure of how average Americans are doing in an economic expansion isn’t jobs, and it isn’t wages per hour.  Rather, it is real aggregate wage growth.  This is calculated as follows:

  • average wages per hour for nonsupervisory workers
  • times aggregate hours worked in the economy
  • deflated by the consumer price index

This tells us how much more money average Americans are taking home compared with the worst point in the last recession.

Why do I believe that this is the best measure of labor market progress?  Let me give you a few examples.

First, compare an economy that creates 1 million 40 hour a week jobs at $10/hour, with an economy that creates 2 million jobs at 10 hours a week at $10/hour.  If we were to count by job creation, the second economy would be better.  But that’s clearly  not the case.  The second economy is paying out only half of the cold hard cash to workers as the first.

Next, let’s compare two economies that both create 1 million 40 hour a week jobs, but one pays $10/hour and the other pays $12/hour.  Clearly the second economy is better.  It is paying workers 20% more than the first.

Finally, let’s compare two economies that create 1 million 40 hour a week jobs at $10/hour.  In the first economy, there are 3% annual raises, but inflation is rising 4%.  In the second, there are 2% annual raises, but inflation is rising 1%.  Again, even though the second economy is giving less raises, it is the better one — those workers are seeing their lot improve in real, inflation-adjusted terms, whereas the workers in the first economy are actually losing ground.

In each case, the economy creating more jobs, or more hourly employment, is inferior to the economy  that pays more in real wages to its workers,  In other words, the best measure of a labor market recovery is that economy which doles out the biggest increase in real aggregate wages. In short, at the end of the analysis, people generally work not for hours, and not for jobs themselves, but for the cold hard cash that is put in their pockets.  That’s why I believe that real aggregate wage growth is the best measure of a labor market recovery.

With that introduction, here are real aggregate wages for the entire past 50 years: IMPORTANT NOTE:  This graph shows *aggregate* real wages.  It is not divided by households or per capita, so this measure doesn’t try to convey how much improved individuals’ lots might be.  It conveys how much more income has become available to the middle/working class as a whole.

For that, we can divide by population to see real wage growth per capita:

So how does the current expansion compare with past ones?  Here is the graph, normed to 100 at the post-recession bottom in real aggregate wages in October 2009:

To compare, here is a chart I created last year showing the real aggregate wage growth in every economic expansion beginning with 1964:

If you want to see the graphs for each expansion, just click here.

Because the above chart was created 8 months ago, the result for the current expansion has changed. Since the bottom 77  months ago, real aggregate wages have improved by 19.5%, an average of .25% per month. Four of the past 7 recoveries have been better.  Three were worse.  Wage growth per month is still anemic, although better than the George W. Bush expansion, .  This recovery has been helped by a big increase in the total number of additional hours worked.

Finally, here is how it compares with the much-vaunted labor recovery of St. Ronald Reagan:

Currently the Obama labor market recovery has almost completely equaled the Reagan recovery 77 months in.  If there is continued improvement for the next 6-12 months, it is likely to surpass Reagan’s record.

cross posted with Bonddad blog